How to calculate the cost-effectiveness of the proposed activities?

2024 Author: Howard Calhoun | [email protected]. Last modified: 2024-01-02 13:48

The cost-effectiveness of the proposed measures shows how expedient the investment of funds was.

Calculation criteria

They can be divided into two groups:

1. Socio-economic.
2. Economic.

The criteria for each category is different. The main one when calculating economic efficiency indicators is considered to be the extent to which an enterprise can maximize its profits, and how effectively capital investments are used. When determining the effectiveness of the socio-economic nature, the main parameter of the assessment is the level of satisfaction of the needs of the population.

In order to have high socio-economic efficiency, the economic system must satisfy a number of human needs. These include material, spiritual, social needs, guarantees of high quality and standard of living.

Method of calculating economic efficiency

Efficiency shows how much profit 1 cashinvestment unit. The higher its value, the better the company will manage the invested funds. The calculation of the economic efficiency of the proposed activities is carried out in order to determine how efficiently the financing was carried out.

Classic costing is the ratio of the result (profit) to the costs incurred to obtain it. The formula for calculating the cost-effectiveness of the proposed activities can be presented as follows:

EE=Eph / Z, where

• EE - economic efficiency;
• З – cost of achieving economic effect (capital investment);
• Eph - economic effect.

There is also a formula for absolute economic efficiency for production and non-production areas of activity. It can be represented like this:

EE=(Eph₁ – Eph₀) / (I + KK_{n), where}

• EE - economic efficiency;
• Eph_{1 – overall result after the events;}
• Eph_{0 – result before events;}
• And - total costs;
• K - investment for events;
• K_{n – normative coefficient.}

Normative coefficient is an indicator that characterizes the minimum allowable efficiency of activity in a particular area. It differs depending on the field.

Capital Efficiency

To appreciatethe effectiveness of capital investment, use two formulas:

1. Coefficient of economic efficiency.
2. Payback period of deposits.

Calculation of economic efficiency from the proposed measures differs in the areas of production and trade. For production, the calculation formula is:

EE_{p=(C - SS) / K, where}

• EE_{p – economic efficiency of production;}
• C - the cost of products manufactured during the year, in wholesale prices;
• K - capital investment;
• CC is the cost of production for the year.

If we talk about trade, it should be noted that the formula for calculating the economic efficiency of the proposed measures has a slightly different form:

EE_{p=(N - I) / K, where}

• EE_{p – economic efficiency in trade;}
• Н - the amount of discounts;
• And - total distribution costs;
• K - invested capital.

Payback term

The second indicator used in evaluating the effectiveness of events is the period for which the invested funds pay off. General payback formula:

T=K / Eph, where

• T - payback period of activities;
• K - invested capital;
• Ef - economic effect of the activities carried out (profit).

To calculate the payback period for activities in the field of trade, the formula is used:

T=K / (S - SS), where

• T - payback term;
• C - the cost of products manufactured during the year, in wholesale prices;
• K - capital investment;
• CC is the cost of production for the year.

In the trading area, the payback period is defined as follows:

T=K / (N - I), where

• T - payback term;
• Н - the amount of discounts;
• And - total distribution costs;
• K - invested capital.