



Cost Analysis

Cost analysis can be defined as a process of evaluating the different elements of
costs that form part of a product or service to ascertain if they are directly or
indirectly related to the product or service and reasonable. The different elements
of costs include the cost of raw materials, labor, supplies, direct overheads, and
a allocation or apportionment of indirect costs to the product or service on a consistent
and scientific basis. The reasonableness of the costs can be determined by analyzing
if the costs are allocable to the product or service. It means analyzing that the
costs are logically required or related to the manufacturing of the product or rendering
of the service. Reasonableness also means applying the test to ascertain if costs
incurred are such that a prudent business would pay in a competitive marketplace.
It basically involves three steps:
- Verifying the accuracy of cost information
- Ascertaining the necessity of the costs incurred
- Application of scientific and standard overhead rates for allocation of indirect costs
As with any analysis, reporting the findings and taking appropriate corrective actions,
where necessary, is the final outcome of the cost analysis process.
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