What is Life Cycle Costing?

This is a method of determining the total cost of ownership (TCO) of equipment. Restated, it involves the identification and documentation of the total costs incurred during an asset's lifetime. For example, one could estimate the overall cost of a building over its useful life. These costs include those associated with planning, designing, construction, maintenance, improvements, and other costs less the cost of disposing of it plus the residual value. All the costs are calculated in present value terms.The LCC technique calculates the actual costs and revenues associated with a particular asset, from acquisition to disposal. It takes into consideration the essential economic factors such as initial capital costs and future operational and asset replacement cost. The technique provides room for making comparative cost assessments over a certain period. 

Back to: ACCOUNTING, TAX, & REPORTING

How Does Life Cycle Costing Work? 

Usually, this process can simple and involve a table consisting of expected annual costs or complicated and entail the use of a computerized model to develop scenarios based on the assumptions on future cost drivers. LCC analyzes alternatives of corrosion management and calculates their cost through this analysis and then characterized using the annualized value.Some expenditure areas that are used to calculate LCC are;

•  Operations and maintenance
•  Planning and design
•  Construction and acquisition
•  Renewal and rehabilitation
•  Depreciation and cost of finance
•  Replacement or disposal.

Benefits of life cycle costing include:

• Project Engineering aims at reducing the costs of capital.
•  Production is determined to increase uptime hours.
•  Maintenance engineering expects to decrease repair hours.
•  Reliability Engineering focuses on avoiding failures.
•  Shareholders want to increase their stockholder wealth.
•  Accounting wants to increase the net present value of the project

LCC emphasizes on the enhancement of economic competitiveness by working for the long-term cost of ownership that has the lowest value. It gives a better assessment of long-term cost-effectiveness of projects.

Related Topics

• Job Costing vs Process Costing
• Assign Direct Material and Direct Labor to Job
• Assign Manufacturing Overhead Costs to Job
• Assign Overhead Costs to Products
• Plantwide Cost Allocation
• Department Cost Allocation
• Activity-Based Costing
• Weighted-Average Cost of Products
• Production Cost Report
• Fixed, Variable, and Mixed Cost Estimations
• Contribution Margin Income Statement
• Cost-Volume-Profit Analysis
• Margin of Safety
• Contribution Margin per Unit of Constraint
• Absorption Costing vs Variable Costing
• Differential Analysis and Decisions
• Cost Decisions for Joint Products
• Capital Budgeting
• Life Cycle Costing
• The Master Budget
• Activity-Based Budgeting
• Standard Costs
• Imputed Value
• Variance Analysis for Product Costs
• Absorption Pricing
• Price Variance
• Absorption Variance 
• Responsibility Centers
• Comparing Segmented Income
• Using ROI to Evaluate Performance
• Using Residual Income to Evaluate Performance
• Use Economic Value Added to Evaluate Performance
• Transfer Pricing