MAF 635 LCC Report

Topics: Cost, Costs, Decision making Pages: 10 (1849 words) Published: May 16, 2015
HISTORY AND BACKGROUND OF LIFE CYCLE COSTING (LCC)

The history of LCC began in the US Department of Defence in the mid-1960s. In the mid-1980s attempts were made to adapt LCC to building investments. Recently several research projects have been carried out aimed at developing the LCC methodology for the construction industry and placing LCC in an environmental context. There are some examples shows the LCC approach. Firstly, Abraham and Dickinson’s study of the disposal of a building in which LCC calculation is used to quantify disposal costs. Secondly, Sterner developed a model for the evaluation of tenders, where she uses LCC methodology to calculate the total energy costs for buildings. Thirdly, Aye et al. used LCC to analyse a range of property and construction options for a building. Lastly, BogenstGatter advocate the usability of performing an LCC calculation in the early design phase. He developed a model using specific characteristic values of LCC, i.e. standardised typological figures. He suggests defined specifications from similar buildings as key solutions to the usability problem. LCC concepts is helps the management to understand the cost consequence of developing and making a products and to identify areas which cost reduction efforts are likely to be most effective. The process of LCC fundamentally involves in assessing cost arising from an assets over its life cycle and evaluating alternatives that have impact on this cost ownership. LCC is usually useful to apply to low technology issues, such as repair and versus replace decisions.

DEFINITION OF LIFE CYCLE COSTING

Life cycle costing is a cost management approach which includes all costs and ensures that all 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 a cradle to grave’.

Product life cycle has four stages:
1. Product planning and initial concept design
2. Product design and development
3. Production
4. Distribution and customer (or logistical) support

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 refer to costs that incurred later in the product lifecycle. These include marketing and advertising costs. All costs and savings can be directly compared and fully-informed decisions can be made.

LCC 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.

PRODUCT LIFE CYCLE STAGES

The graph below illustrates life cycle costs and cost commitment for a typical product.

From the graph above, committed cost refer to cost that may be incurred in the future due to decision that have already been made at the earlier stage. On the other hand, cost incurred refer to cost that have been incurred when the resources is used.

The first stage in the product life cycle are product planning and initial concept design. It involves process of identifying any underlying conditions, assumption, limitations and constraints such as minimum asset performance and maximum capital cost that might be restrict the range of acceptable opinions to be evaluated. It is a valuable reference for better decision whether the plan should be carried on or otherwise. Cost that may be incurred during this stage are R&D cost and market research cost.

The second stage is product design and development. This stage starts from preparation of the development contract until the...

References: 1) http://simple.werf.org/simple/media/LCCT/index.html
2) http://www.accaglobal.com/uk/en/student/acca-qual-student-journey/qual-resource/acca-qualification/f5/technical-articles/target-lifestyle.html
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