What is "cost-benefit analysis" in budgeting?

Cost-benefit analysis is a systematic approach used in budgeting to evaluate the anticipated costs of a project against the expected benefits. The primary goal of this analysis is to assess the financial viability of a project or program by determining whether the benefits outweigh the costs, which helps decision-makers choose among competing alternatives based on their potential return on investment.

This process involves quantifying both costs and benefits, often assigning monetary values to non-monetary factors to allow for a comprehensive comparison. By providing a clear framework for evaluating a project's overall value, cost-benefit analysis enables organizations to prioritize investments and allocate resources more effectively. It is a critical tool for ensuring that budgetary decisions lead to favorable outcomes and contribute to the financial health of an organization.

In contrast, simply analyzing costs does not provide a full picture of a project's potential effectiveness or its value in relation to its expenses. Other options, such as comparing budget allocations or enhancing budget efficiency, while important processes in budgeting, do not capture the essence of evaluating the trade-offs between costs and benefits that define cost-benefit analysis.