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Chapter C

CNIT 18000 Chapter Notes - Chapter C: Systems Development Life Cycle, Financial Analysis, Indirect Costs

Computer & Info Tech
Course Code
CNIT 18000
Barlow Victor

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CNIT180 Toolkit C
Financial Analysis Tools
C.1 Introduction
A system analyst needs to know how to calculate costs and benefits when conducting preliminary investigation, evaluating IT
projects, and making recommendations to management. Financial analysis tools are important throughout the systems
development life cycle.
A project is economically feasible if the future benefits outweigh the estimated costs of developing or acquiring the new
C.2 Describing Costs and Benefits
A systems analyst must review a project’s cost and benefits at the end of each SDLC phase so management can decide
whether or not to continue the project. When economic feasibility is determined, the project’s benefits compared to the
project’s total cost of ownership (TCO) must be considered, which includes ongoing support and maintenance costs.
C.2.1 Cost Classification
Costs can be classified as tangible or intangible, direct or indirect, fixed or variable, and developmental or
o Tangible costs are costs that can be assigned a specific dollar value
o Intangible costs are costs whose dollar value cannot be calculated easily
o Direct costs are costs that can be associated with the development of a specific system
o Indirect costs (overhead expenses) cannot be attributed to the development of a particular information
o Fixed costs are costs that are relatively constant and do not depend on a level of activity or effort; many
recur regularly
o Variable costs are costs that vary depending on the level of activity
o Developmental costs are only incurred once, at the time the system is developed or acquired
o Operational costs are incurred after the system is implemented and continue while the system is in use
C.2.2 Managing Information Systems Costs and Charges
A chargeback method is a technique that uses accounting entries to allocate the indirect costs of running the IT
department. Most organizations adopt one of four chargeback methods:
o No Charge Method
Some organizations treat information systems department indirect expenses as a necessary cost of
doing business. In this case, the information systems department is called a cost center because it
generates accounting charges with no offsetting credits for IT services
o Fixed Charge Method
The indirect IT costs are divided among all other departments in the form of fixed monthly charge.
The monthly charge might be the same for all departments or based on a relatively constant factor.
A profit center is a department that is expected to break even or show a profit.
o Variable Charge Method based on Resource Usage
Resource allocation is the charging of indirect costs based on the resources used by an
information system. Connect time is the total time that a user is connected actively to a remote
In a client/server system, server processing time is the time that an actually responds to client
requests for processing.
o Variable Charge Method based on Volume
The indirect IT department costs are allocated to other departments based on user-oriented
activity. A department’s share of the costs varies from month to month, depending on the level of
C.2.3 Benefit Classifications
Positive benefits increase revenues, improve services, or otherwise contribute to the organization as a direct result
of the new information system. In contrast, cost-avoidance benefits refer to expenses that would be necessary if the
new system were not installed
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