Life Cycle Costing
Life cycle costing is a system that records and aggregates the real expenses and profits attributed to a cost item from its inception until its abandonment. Life cycle costing entails tracking costs and revenues on a product-by-product basis throughout many calendar periods.
The Life Cycle Cost (LCC) of an asset refers to all expenses associated with its ownership and use, including planning, design, procurement, and support.
The Life Cycle Cost (LCC) of an object is the overall cost of ownership, including all costs spent throughout the item’s life to purchase it, run it, maintain it, and eventually dispose of it. Life Cycle Costing includes all expenses during their life cycle and allows for a common assessment for the chosen time (typically discounted costs are employed).
This allows choices about purchase, maintenance, refurbishment, or disposal to be made in light of the whole cost implications. In summary, Life Cycle Costing is a method of evaluating all of the expenses associated with purchasing, operating, maintaining, and eventually disposing of a product during its lifetime.
Life cycle costing differs from traditional cost accounting systems in that it involves tracing costs and revenues of a cost object (e.g., product, project, etc.) over several calendar periods.
Thus, product life cycle costing is a method for providing a long-term picture of product line profitability, feedback on the success of life cycle planning, and cost data to illustrate the economic impact of various choices made throughout the design, engineering, and other phases.
It is also thought to help with cost management in the production process. It is critical to monitor and assess expenses at each step of a product’s lifespan.
Characteristics of life cycle costs
Product life cycle costing is the process of tracking a product’s expenses and revenues across many calendar periods throughout its life cycle.
Product life cycle costing tracks research and development expenditures, as well as their overall size for each unique product, and compares them to product income.
Each stage of the product’s life cycle presents unique challenges and possibilities that may need various strategic responses.
Product life cycles may be prolonged by discovering new uses or users, or by raising the consumption of existing users.
Stages of Product Life Cycle Costing
The following are the key phases of the product life cycle:
(i) Market Research.
It will determine what product the buyer wants, how much he is willing to spend for it, and how much he intends to purchase.
(ii) Specification.
It will include information such as the needed life, maximum allowable maintenance expenses, production costs, required delivery date, and predicted product performance.
(iii) Design: Define proper drawings and process schedules.
(iv) Prototype Manufacturing
A limited batch of the product will be created based on the designs. These prototypes will be used to help develop the product.
(v) Development.
Following the first run, tests and changes are made to fulfill requirements. This era of testing and change is known as “development.” When a product is initially manufactured, it seldom fulfills the specifications, and revisions must be made until it does.
(vi) Tooling.
Building a manufacturing line, jigs, and required tools and equipment need a significant initial investment. (vii) Manufacturing
A product is manufactured by purchasing raw materials and components, as well as employing labor and incurring production fees.
(viii) Sales (ix) Distribution (x)Product Support (xi) Decommissioning
When a manufactured product is no longer in production, the factory where it was built must be sold or dismantled.
Benefits of Product Life Cycle Costing
The following are the major advantages of product life cycle costing:
(i) Early action may lead to increased income or decreased expenditures. There are many aspects that must be addressed in order to maximize the return on a product.
(ii) Accurate and realistic income and cost assessments within a life cycle stage may lead to better decisions.
(iii) It promotes long-term rewards above short-term rewards.
(iv) It offers a methodology for calculating total additional costs over a product’s lifecycle.
The Life Cycle Costing Process
Life cycle costing is a three-step approach. The first step is life cost planning, which involves LCC analysis planning, LCC model selection and development, LCC model application, and LCC results recording and evaluation. The second step is Life Cost Analysis Preparation, which is followed by the third stage, Implementation and Monitoring of Life Cost Analysis.
There are three stages:
The Life Cycle Costing Process
LCC analysis is a multidisciplinary endeavor. An analyst working in life cycle costing should be well-versed on the particular cost factors involved in an asset’s life cycle, as well as the sources of cost data to be gathered and the financial principles to be used.
He should also have a thorough awareness of strategies for analyzing the uncertainties involved with cost estimates. A number of iterations may be necessary to attain the desired outcome. All of these iterations should be well recorded in order to aid the understanding of the final outcome.
Stage One: LCC Analysis Planning:
The Life Cycle The costing process starts with the creation of a strategy that specifies the objective and scope of the study.
The strategy should clearly define the analytical goals and outputs needed to support management decisions.
The typical aims are:
The LCC for an asset is determined to aid with planning, contracting, budgeting, and other comparable purposes.
The influence of different courses of action on an asset’s LCC (for example, design methods, asset acquisition, support policies, or alternative technologies).
Identification of cost aspects that serve as cost drivers for an asset’s LCC in order to concentrate design, development, acquisition, or asset support activities.
Create a thorough schedule that includes the time period for each phase as well as the operational, technical, and maintenance assistance needed for the asset.
Identify any underlying criteria, assumptions, limits, or constraints (such as minimum asset performance, availability requirements, or maximum capital cost limitations) that may limit the eligible possibilities for evaluation. Determine various courses of action to be assessed.
Determine various courses of action to be assessed. The list of recommended alternatives may be revised when new possibilities emerge or old solutions are discovered to contradict the problem restrictions.
Provide an estimate of the resources necessary for the analysis, as well as a reporting timetable, to ensure that the LCC findings are accessible to assist the decision-making process.
The next phase in LCC Analysis planning is to pick or construct an LCC model that meets the analysis’s goals. The LCC Model is essentially an accounting system that allows you to estimate the cost of an asset component.
Stage 2: Life Cost Analysis Preparation
The Life Cost Analysis is basically a method for controlling and managing the continuing expenses of an asset or a portion thereof. It is based on the LCC Model, which was created and deployed during the Life Cost Planning phase, but with one key difference: it employs real-cost data.
The Life Cost Analysis entails reviewing and developing the LCC Model as a “real-time” cost control mechanism. Actual prices paid will be used instead of capital cost estimates. Changes may also be necessary to the cost breakdown structure and cost elements to reflect the asset components to be tracked and the amount of granularity required.
Targets for operational costs and frequency of occurrence are established based on estimations made during the Life Cost Planning phase. However, these objectives may alter over time when more precise data is available, either from the actual asset operating costs or from the operating costs of a comparable asset.
Stage 3: Implementation and Monitoring.
The implementation of the Life Cost Analysis entails continuously monitoring an asset’s real performance throughout operation and maintenance in order to identify areas where cost reductions may be achieved and to offer input for future life cost planning efforts.
For example, it may be preferable to replace a costly construction component with a more efficient solution before it reaches the end of its useful life than to persist with a bad original option.