Cost Analysis- Leverage This Important FBA Decision-Making Tool (Part 2 of 2)

 

Cost Analysis: Leverage This Important FBA Decision-Making Tool (Part 2 of 2)

In part 1, we talked about the significance of cost analysis for your Amazon FBA store and how you can best utilize financial information to your advantage. Now, in part 2, you will learn about the preparatory steps, and how to conduct an effective cost analysis.

Cost Analysis—The Preparatory Steps

Understand the 5 Goals of Cost Analysis:

1. To determine profitability. Find out how much each profit center, product line and customer contributes to the project.
2. To find out whether your business or project can benefit from lean accounting in support of lean production techniques and lean business principles.
3. To ensure coordination between financial and management systems. Aim to strike a balance between responsibility and authority to enhance the effectiveness of your information system.
4. Go for a balanced approach. Ensure that various constituencies and needs of your project receive equal attention.
5. Examine the cost and benefit of operational options. For example, look into the possibility of outsourcing. If the benefit outweighs the expense, then go for it.

Conducting Cost Analysis

Cost analysis should be conducted at least twice for each of these project development stages:

1. Concept Phase
2. Predevelopment Phase
3. Development Phase

5 things to watch out for:

1. Your cost analyses should build upon the previous stages of development.
2. Avoid redundancy of procedure. Every analysis should be different from the previous one.
3. See to it that an unbroken line of cost analyses are conducted throughout the development process.
4. Make sure that these are conducted at ever increasing levels of accuracy and detail.
5. Have a system for filing the results of each analysis as they are completed.

As you progress from one stage of your project to the next, cost analysis should become more accurate and detailed. During the beginning stages, square foot costs estimates may be sufficient. But as the design grows in complexity, such as during the development stage, you will be able to make a more accurate cost estimate, as you leave behind the square foot technique you employed earlier. This time it will be based on the costs of each product and material.

So instead of basing your estimate on the relative complexity and size of the project, this time you can utilize a far more accurate method of basing the cost on each component that is needed and included in the project.

Cost analysis is simply systematize, rational decision making. Sometimes our view of costs and benefits can be influenced by our biases or preconceived ideas. This is especially true when we are faced with complex alternatives or uncertain data. Thus we need to employ formal methods to keep our thinking rational, clear, systematic and in line with our goals.

Here are 7 guidelines you can follow for conducting an effective cost analysis:

1. Identify and explore various alternatives.
2. When comparing alternatives, make sure to use the same criteria for all of them.
3. Make allowances for occurrence of costs and benefits at various stages of the project.
4. As much as possible, express things in dollar for clarity even if it’s not customary to express them in that way.
5. Cope with data uncertainty.
6. Sum up costs and benefits to serve as a guide for decision-making.
7. Once you have gathered all the pros and cons and have expressed them in dollars, you can begin putting together an accurate cost analysis.

 

Bear in mind that these are merely tools. These are not what make a good cost analysis. The essence of cost analysis is the accuracy of your understanding and the way you present various options. 

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