 # Meaning of Cost Comparison Calculation

The cost comparison calculation is a method of the static investment calculation. It is mainly used for easily comparable capital goods that do not require more complex calculations.

## Definition: cost comparison calculation

In the cost comparison calculation, various investment options are compared and compared on the basis of their costs. Other influencing factors are not taken into account. Accordingly, it is usually very easy to carry out and a useful method of investment calculation.

A distinction is made whether the costs of a period or the costs per unit are compared. The comparison per piece or per created unit makes sense if the different comparison objects can produce different numbers of pieces. A concrete example is when two machines are compared and one machine is able to produce a higher number of pieces within the same period. In such a case, the costs per year must not be compared, but the calculation must be based on the costs per unit.

### Advantages of the cost comparison calculation

According to polyhobbies.com, the cost comparison calculation is a comparatively simple, static calculation and part of the investment calculation . It can be carried out very quickly, as the data required for the calculation are typically available immediately for comparison. In addition, the cost comparison can serve as a basis for eliminating the first alternatives and making further calculations (e.g. profit comparison calculation).

## Critical quantity in the cost comparison calculation

One of the central factors in the cost comparison calculation is the critical amount. It indicates the quantity at which the compared options are equally good or at what quantity one of the two options is superior to the other.

A classic example of this would be when it is better to buy a petrol instead of a diesel-powered car.

Practical example:
The costs for a vehicle with a diesel drive are higher to purchase. This means that the depreciation can be set accordingly higher. At the same time, the running costs per kilometer are lower. This makes it easy to determine from which number of kilometers per year which type of drive is cheaper.

## Costs taken into account in the cost comparison calculation

In order to be able to objectively compare the various investment alternatives, paid and imputed costs are included.

• Pagatory costs
In short, the Pagatory costs are those costs that change with the number of pieces produced. An obvious example are material costs and labor costs. To determine the quantity of pieces produced is multiplied by the variable costs per piece.
• Imputed costs
to the imputed costs include the imputed interest and cost-accounting depreciation. With interest, the acquisition value, residual value and the indication of the year are used to determine how much capital is tied up on average through the investment. The depreciation itself is calculated based on the acquisition cost and useful life.

## Types of cost comparison calculation

Now we will introduce you to the two types of cost comparison calculation , the period-based and the unit cost-based calculation , and also discuss the respective types of calculation .

### Period-based cost comparison calculation

With the period-based cost comparison calculation, those average costs that are incurred within a period, for example within a year, are compared. The costs thus include the fixed costs, variable costs, imputed depreciation and imputed interest.
In order to illustrate the period-based cost comparison calculation more clearly, we take as an example that two production machines are to be compared with one another.

#### Definition of fixed costs

The fixed costs are all those costs that are incurred regardless of how many pieces are produced. In our example, these can be maintenance costs that are incurred once a year, regardless of whether the machine is in use or at a standstill.

#### Calculating variable costs

The variable costs are usually stated per piece. In the case of a machine in production, this can mean that costs of € 1 are incurred per piece produced. The costs per piece are multiplied by the production quantity, for example 10,000 pieces are produced per year, so the total variable costs are 10,000 euros.

#### Calculation of the imputed depreciation

With imputed depreciation , the residual value can either be taken into account or not taken into account. The residual value is the value that, for example, a machine still has after its useful life has expired. If a machine is written off over a period of about ten years, but is not broken after this period, it de facto no longer has a residual book value, but in reality it still has a certain value.

Formula: Depreciation with residual book value
Depreciation is determined by subtracting the residual book value at the end of its useful life from the purchase price of the asset. The result is divided by the useful life in years.

Depreciation = AW – RBW (n) / ND in years

The residual book value is also taken into account in the formula. In principle, straight-line depreciation can also be determined without taking the residual book value into account. But if you are faced with an investment decision, the residual book value should be considered. After all, one machine may be worth even more than the other machine at the end of its useful life, which can definitely influence your investment decision.

#### Calculation of imputed interest

When determining the imputed interest, the primary question is how much capital is tied up on average for the investment.

Formula: Imputed interest
The calculation is carried out as follows: Acquisition value and residual value at the end of the useful life are added. The sum is divided by two and the result is multiplied by the imputed interest rate.

Lime. Interest = (AW + RWB (n) / 2) xi

The imputed interest rate “i” can be, for example, the interest rate that is paid for a loan that is taken out to finance the machine.

#### Result of the period-related cost comparison values

The result of the calculation shows which of the investment alternatives is advantageous from a purely cost-technical point of view. The comparison is somewhat one-sided, since the revenue situation is not taken into account when considering the costs.

### Unit cost-based cost comparison calculation

If the calculation now also takes into account that the machines have different output quantities, the overall result can change significantly again.
The total costs have already been determined for both machines. Now these are divided by the maximum output quantity in order to know the costs per piece. With this simple additional step, the investment alternatives can be compared even more easily.

## Calculation with Excel

If you want to do a cost comparison calculation yourself, you can do it quickly, easily and clearly in Excel. You can enter the various data (acquisition costs, useful life, etc.) in tabular form so that you can link all fields with formulas.

If only the fields with the individual data of the comparison objects have to be entered and all further calculations are made using the stored forms, you save a lot of time. So you can then use the template you have created again and again for all comparisons and also quickly compare many alternatives with one another.

## Criticism of the cost comparison calculation

The central point of criticism of the cost comparison calculation is that the static consideration can only determine a relative advantage. In concrete terms, this means that although it is possible to calculate which investment has lower costs, it cannot determine which profit opportunities the investments bring with them.
It would be conceivable, for example, that one machine may cause higher costs than another, but the output is better. The quality produced could be higher and thus also the achievable price for the manufactured products. Therefore, the cost comparison calculation is a calculation that ideally should not be done alone, without additional calculations and comparisons.

However, the criticism is offset by the argument of simplicity, because the static cost comparison calculation can give a quick first overview of which options remain in the running and which may be eliminated right from the start. 