Definition of Cost Evaluation

Any project or organization that uses financial or other resources to operate uses cost evaluation. In general terms, cost evaluation is the process of determining how resources are used. It can be on any scale, from as focused as one single project or unit of an organization, to broad, comparative studies of resource allocation in a whole network of organizations. Generally, a cost evaluation is only one part of a broader cost-benefit analysis, with the goal of determining whether resources are being used efficiently.

One of the steps in tracking the use of resources in a project or organization is identifying the costs associated with whatever activity is being evaluated. For example, a store owner's cost evaluation would include expenditures such as employee salaries, building maintenance and security, product purchases and so on. This part of a cost evaluation should also take the type of cost into account. An example of a fixed cost, which doesn't change with activity levels, would be the rental and heating of the store space. A variable cost, on the other hand, might be the cost of products offered at different times of the year.

Another aspect of cost evaluation has to do with determining how resources are distributed among individual units. For evaluative purposes, a “unit” is any arbitrary measurement of activity within a project or organization. In health care, for example, one unit might be a counseling visit. In the digitization project at the Biblioteca Nacional of Spain, possible units might be the production of individual CDs or other digital copies.

Calculating the cost of units in a budget analysis means assigning a numerical value to individual aspects of a project or division of an organization. If a store owner sells coffee and it takes $1,000 a day to pay for the grind, sugar, cream, cups, maintenance of the espresso machines, employee salaries and all other expenses that it takes to provide coffee to customers, then the value of a single unit (i.e., the time and money it takes to make one cup of coffee) would be the $1,000 spent per day to provide coffee, divided by the total number of cups sold in a day.

Cost evaluations can be for single projects or divisions of an organization, company-wide analysis of costs or comparative studies of multiple organizations. This last type of analysis can be useful for departments or projects funded by tax dollars, as a way of showing the impact of those costs on society. Figuring out unit values is important because it can be compared with revenues from individual units to see whether a particular project or company division is profitable or efficient. This is known as a cost-benefit analysis.