Life Cycle Costing

Life cycle costing can be defined as a system used that tracks and accumulates the actual costs and revenues attributable to cost object from its invention to its abandonment. The process of life cycle costing involves tracing cost and revenues on a product by product base over several calendar periods. Life Cycle Cost (LCC) of an item represents the total cost of its ownership, and includes all the cots that will be incurred during the life of the item to acquire it, operate it, support it and finally dispose it. Note, Life Cycle Costing adds up all the costs over their life period and enables an evaluation on a common basis for the specified period (generally the discounted costs are used). This allows the decisions to be taken on acquisition, maintenance, refurbishment or disposal taking into account full cost implications. Life Cycle Costing is primarily a method of estimating all the costs involved in procuring, operating, maintaining and ultimately disposing a product throughout its life.

Here, the total cost of ownership of an asset is often far greater than the initial capital outlay cost and can vary significantly between different alternative solutions to a given operational need. Considering the costs over the whole life of an asset provides a sound basis for decision-making.

Features of Life Cycle Costing

1. It helps in assessing the future resource requirements via projection of projected itemized line item costs for relevant assets
2. It helps in assessing the comparative costs of potential acquisitions e., investment evaluation or appraisal
3. It helps in deciding between sources of supply e., source selection
4. It accounts for resources used now or in the past e., reporting and auditing
5. It helps improve system design via better understanding of input trends such as manpower and utilities over the expected life cycle
6. It helps in optimizing operational and maintenance support using more detailed understanding of input requirements over the expected life cycle
7. It helps in assessing the when assets reach the end of their economic life and if renewal is required by understanding the changes in input requirements such as manpower, chemicals, and utilities as the asset ages.

The life cycle cost analysis takes into account the analysis of the costs of a system or a component over its entire life span. Typical costs for a system may includes,

1. Acquisition costs (or design and development costs)
2. Operating costs
3. Cost of failures
4. Cost of repairs
5. Cost for spares
6. Downtime costs
7. Loss of production
8. Maintenance costs:
9. Cost of corrective maintenance
10. Cost of preventive maintenance
11. Cost for predictive maintenance
12. Disposal costs.

The Life Cycle Costing process can be illustrates as simple table of expected annual costs or it can be a computerized complex model that allows for the creation of scenarios based on assumptions about future cost drivers. Here the scope and complexity of the life cycle cost analysis reflects the complexity of the assets under investigation, that is the ability to predict future costs and the significance of the future costs to the decision being made by the organization.

Formula for calculating life cycle cost of an asset

Life Cycle Cost = Initial (projected) capital costs + Projected life-time operating costs + Projected life-time maintenance costs + Projected capital rehabilitation costs + Projected disposal costs – Projected residual value.