LIFE CYCLE COSTING

What is Life Cycle Costing?

• Life cycle costing is defined as the total cost throughout its life including
planning, design, acquisition & support costs & any other costs directly
attributable to owning / using the asset.
• Category of LCC Capital assets :
•Initial costs
•Operating costs
•Disposal costs
Life Cycle Costing
 Life Cycle Costing Objectives
• Assists management to smartly manage total cost throughout product’s
life cycle.
• To identify areas in which cost reduction efforts are likely to more
effective.
• To estimate the cost impact of various designs and support options.
 Life Cycle Costing Concept
• Help management to understand the cost consequence of developing and
making a product and to identify areas which cost reduction efforts are likely
to be most effective.
• The process of LLC fundamentally involves :
 Assessing cost arising from an assets over its life cycle
 Evaluating alternatives that have impact on this cost ownership
 Useful apply to low-technology issues, such as repair versus replace decisions
 How to use life cycle costing?
• Life cycle costing enables you to plan efficiently and cut costs along the way.
• It is used by businesses that are involved in long-term planning.
• Life cycle costing enables businesses to make better decisions with regard to their
investments
 Cost Committed & Cost Incurred
• Cost that have not yet been incurred but will be incurred in the future
on the basis of decision already been taken are termed committed costs
• Cost incurred when a resource is used or sacrificed. The actual cost of
product is built up mostly in the growth stage and matured stage.
 Purpose of Life Cycle Cost Analysis
• Cost identification
The purpose of life cycle cost analysis is to identify all types of costs that a
business may not think of in the initial stages.
• Costs comparison
to make effective decisions that can prove fruitful in the long term.
• Effective planning
A business can effectively plan when it is aware of the various costs involved.
 Conclusion
• The management can know whether the revenue earned by the product
is sufficient to cover the costs incurred during its life-cycle.
• There are opportunities for cost reduction and minimization (and
thereby scope for profit maximization).
• We will find out about the costs involved at different stages of the life-
cycle and the implications of life-cycle costing on pricing, performance
management and decision making.