1.0 Life cycle costing (LCC)
Life cycle costing is a cost management approach which includes all costs and ensures that all those costs are managed over the life cycle of the product. Product life cycle begins from conception of the product until its abandonment which can be referred as ‘from cradle to grave‘. Product life cycle has four stages: 1) Product planning and initial concept design
It involves process of identifying any underlying conditions, assumption, limitations and constraints such as minimum asset performance, maximum capital costs that might restrict the range of acceptable options to be evaluated. It is a valuable reference for better decision whether the plan should be carried on. This includes the research and development cost market research costs. 2) Product design and development
Starting from preparation of development contract until equipment is ready to be introduced to the business. It is also a stage where the factory trials take place. Cost of product design, prototyping, and market testing costs. 3) Production
All the manufacturing costs related to producing the products such as direct material, labor, overhead and administrative costs will be incurred. 4) Distribution and customer (or logistical) support
This stage is where product are sent to customers and ready to be used. All marketing, selling and distribution costs are incurred at this stage. As for logical support cost, it involves delivery and transportation costs, warehousing costs, dismantling cost and costs for abandonment of the project and some equipment might need to be disposed of or recycled. All expenditure for resources that are likely to arise must be addressed. Future costs are also taken into consideration and will be discounted to the present value. LCC includes all the upstream costs and downstream costs. Upstream costs involved in producing a good include research and development costs, such as salaries paid to research engineers. Downstream costs, on the other hand, are incurred later in the product lifecycle. These include marketing and advertising costs. All costs and savings can then be directly compared and fully-informed decisions can be made. The reasons why companies adopt LCC are because it enables the management to make assessment of the profitability of a product over its life cycle. This helps managers to decide and choose on which products to produce and can increase company’s sales revenue. LCC also could prevent losses from project abandonment or suspension in work in progress due to insufficient funds. By using LCC, all expenditure will be taken into account hence, all the expenditures will be fully disbursed as and when the product life cycle ends. The graph below illustrates life cycle costs and cost commitment for a typical product.
1.2 Elements of Life Cycle Costing
The purpose of calculating this technique is to analyze all the costs that have to be borne by the company in acquiring a new asset. According to Nijhar Charavorti (2009), this technique serves as the decision making tool in which it combines the conflicts by emphasizing on the facts, money and time. For example, to compute the ’cradle to grave’ costs of an equipment, the company should include not only the purchase price (money), but also the any costs afterwards which will be incurred (facts) throughout its lifespan (time). The ‘costs afterwards’ which are inclusive of operation costs, maintenance costs, and disposal cost, are calculated using Net Present Value at discounted factor. There are three elements in Life Cycle Costing which are:
a) Initial costs
This element represents the acquisition cost, construction cost, installation cost and/or design cost of equipment. These one-off initial costs will only be incurred by the company at the beginning of the acquisition of the assets.
b) Operation and maintenance costs
Meanwhile, operation and maintenance costs which also include labor and training costs...
Please join StudyMode to read the full document