Social costs are subsidies that would have to be paid to compensate persons adversely affected by a project or program for their suffering or "disbenefits" and can be treated as:. The Activity-Based Costing ABC model re-configures how organizations manage costs by attaching costs to activities carried on in support departments.
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ABC is a process-oriented method that recognizes labor-intensive processes may represent the single largest contribution to the increasing cost of doing business. ABC recognizes that the pro-rating method used in traditional cost accounting does not truly account for the usage variance in process costs that may exist in different units. ABC provides a more representative distribution of resource use since cost allocations are based on the direct cost drivers inherent in work activities.
Costs must be traced from the traditional cost accounting structure which identifies what resources are being used to the activities which relates why resources are being consumed-- for what purpose.
The next step is to quantify the volume of each activity's output, either as an actual historical volume or as a projected volume define an output measure. Performance measures are identified to determine the results achieved by an activity or activity center e. Activity-based costing represents a new way of doing business, but can complement and extend the benefits of both process reengineering and responsibility center management. Cost-benefit analysis requires that estimates of the direct and indirect costs and the tangible and intangible benefits be translated into a common measure, usually a monetary unit.
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Discounted cash flow techniques apply principles of compound interest to take into account differences in the worth of money over time and to examine the future negative and positive cash flows costs and benefits required to produce the desired returns. The net present value NPV method gives the algebraic difference of both outward cash flows and inward flows of income or benefits.
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The equivalent uniform annual net return EUANR combines all investment costs and all annual expenses into one single annual sum that is equivalent to all disbursements uniformly distributed over the analysis period. R includes return on investment depreciation and net profit.
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Cost-benefit analysis involves an identification of: 1 an objective function, 2 constraints, 3 externalities, 4 time dimensions, and 5 risk and uncertainty. Selecting an objective function involves the identification and quantification of the benefits and costs associated with each alternative. Constraints are the "rules of the game"--the limits within which a solution must be sought. Solutions that are otherwise optimal frequently must be discarded because they do not conform to these imposed rules.
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Projects may have externalities or spill-over effects--i. Two common bases for discounting to accommodate the time dimensions of the analysis reflect both local conditions and the marketplace for investments:. Cost-benefit analyses provide only limited assistance in evaluating programs of relatively broad scope or in comparing programs with widely differing objectives. Other factors must be considered in selecting an appropriate or "best" decision, including:.
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The effectiveness of a program is measured by the extent to which, if implemented, some desired objective will be achieved --either 1 a desired level of performance at the minimum cost or 2 the maximum level of performance possible for a given level of cost. Which of the following is NOT a typical requirement for a life settlement? Life expectancy of the insured is less than 12 years b. The insured has had a change in health since the policy was issued c. The policy must be at least 2 years old d. The insured must generally be in good health Answers: 1.
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