LIFE CYCLE COSTING: Brief Explanation & Analysis

Introduction

Life Cycle Costing is the summation of costing incurred throughout various stages of a product including installation, operation, maintenance and decommission of the product. It is basically the process of compiling all costs that the owner or producer of an asset will incur over its lifespan.

?     Life cycle costing is often used as a tool for decision making by synchronizing the conflicts on a divisional level by having main focus on facts, time processing and expenditure. It was originally designed for investment prospective in the U.S. Department of Defence. Later its application was enforced in the automobile and engineering sector. Slowly it expanded to other high investment sectors like the construction industry.

?     According to the industry standards, the operational cost of a building become as high as the cost of construction after 6-8 years since its inception.

Objective

The Objective of this analysis is to provide input regarding design, operations thus leading to minimal cost of ownership.

The organisational costs in an organisation can be associated with the concept of Iceberg where only the tip of ice-berg seems to be the cost of the organisation but actually it is backed by an enormous mass inside which isn’t visible but form an integral part of the whole expenditure.

The Life cycle costing can be distributed into 2 approaches:-

-Deterministic Approach – Where exact cost is determined.

-Probabilistic Approach- Where a range of values is determined with a specific probability distribution

Since the costs involved in Life Cycle Costing consist of various components thus it can be deduced into a formula which is as follows:-

LCC= Cic + Cinsr + Ce + Co + Cm + Cs + Cd

·       Initial cost(Cic)

·       Delivery and installation costs(Cinst)

·       Energy cost(Ce)

·       Operational cost(Co)

·       Maintenance csot(Cm)

·       Downtime costs(Cs)

·       Decommissioning/disposal costs(Cd)

CASE STUDY: LIGHT BULB INSTALLATION

A company wants buy light bulbs for one of its offices and they want the bulb to work for 10000 hours.

The company can either buy:-

-        100 watt incandescent bulb

-        25 wall compact fluorescent bulb

Now the company has to decide as to which one is better for the company.

Now, the cost of a light bulb can be divided into 2 categories namely- Initial cost and Operational & maintenance cost.

Alternative

Initial Cost

Operational & Maintence Cost

Life Cycle Cost

Incandescent bulb

Rs 350

Rs 16000

Rs 16350

Compact fluorescent Bulb

Rs 1500

Rs 4000

Rs 5500

Thus it can be seen from the calculation that operational and maintenance cost of the bulbs are far more than their initial costs.

Hence a rational decision maker will prefer Fluorescent Bulb for his company to buy for its long term sustainability as it would prove to be more economic in the long run.