Back to: ACCOUNTING, TAX, & REPORTING
Life Cycle Costing Definition
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.
A Little More on Life Cycle Costing
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.
References for Lifecyle costing
Academic Research on Life Cycle Costing
- Life cycle costing—theory, information acquisition and application, Woodward, D. G. (1997). International journal of project management, 15(6), 335-344. This paper explains the importance of management in realizing the source and impacts of lifetime costs in order to take the necessary action to control them. It encourages a long-term outlook on the investment decision-making process instead of acquiring assets with just lower purchasing costs.
- Life–cycle costing manual for the federal energy management program, NIST Handbook 135, Fuller, S., & Petersen, S. (1996). (No. Handbook (NIST HB)-135). This paper aims at facilitating the implementation of FEMP rules by explaining the measures, assumptions, and procedures of the LCC method in the performance of evaluations and noting the NIST computer software necessary for computing and reporting.
- The life cycle costing (LCC) approach: a conceptual discussion of its usefulness for environmental decision-making, Gluch, P., & Baumann, H. (2004). Building and environment, 39(5), 571-580. This paper discusses the theoretical assumptions and the usefulness of the LCC technique in making environmentally responsible investment decisions.
- Life cycle assessment and life cycle costing of bioethanol from sugarcane in Brazil, Luo, L., Van Der Voet, E., & Huppes, G. (2009). Renewable and sustainable energy reviews, 13(6-7), 1613-1619. This study focuses on the main application in Brazil, sugarcane-based ethanol to present a comparative life cycle assessment on gasoline and ethanol as fuels with two types of blends of gasoline with bioethanol used in a midsize car.
- Life cycle costing in LCM: ambitions, opportunities, and limitations, Rebitzer, G., & Hunkeler, D. (2003). This paper provides a view on the ambitions, opportunities, and limitations of LCC in LCM with a goal to shed light on its essential aspects and propose a framework.
- Reconciling theory and practice of life–cycle costing, Cole, R. J., & Sterner, E. (2000). Building Research & Information, 28(5-6), 368-375. This article purposes of identifying various critical gaps between the theory and practice of LCC analysis to determine the strategies that encourage greater use.
- Life cycle costing: a review of published case studies, Korpi, E., & Ala-Risku, T. (2008). Managerial Auditing Journal, 23(3), 240-261. This paper provides an overview of the uses and implementation feasibility of LCC by reviewing the reports on its applications.
- The use of life cycle costing in acquiring physical assets, Taylor, W. B. (1981). Long Range Planning, 14(6), 32-43. This article investigates the LCC concept and provides an explanation of what is involved in using this method. It includes a case study that illustrates the importance of life cycle costing.
- Life cycle costing for construction projects, Wübbenhorst, K. L. (1986). Long Range Planning, 19(4), 87-97. This study explains the concept and the objectives of LCC as a valuable tool in a period of depression and high inflation and presents a very comprehensive way of applying it.
- Life Cycle costing—paving the road to sustainable development?, Hunkeler, D., & Rebitzer, G. (2003). The international journal of life cycle assessment, 8(2), 109-110. This paper uses the Kyoto protocol as an example of how LCC is an important link for connecting environmental concerns with core business strategies.
- Integrating life cycle costing and life cycle assessment for managing costs and environmental impacts in supply chains, Rebitzer, G. (2002). (pp. 127-146). Physica, Heidelberg. This article introduces an LCC concept for determining total costs accompanying the production, use, and disposal of product or service which is based on the environmental life cycle assessment framework on the application level.