MANAGEMENT ACCOUNTING CASE PRESENTATION

LIFE CYCLE COSTING

What is Life Cycle Costing? - ISO 15686-5 defines Life cycle cost as ‘the cost of an asset, or its parts throughout its life cycle, while fulfilling the performance requirements’

- Methodology for systematic economic

evaluation of life cycle costs over a period of analysis

- Economic value of an asset = NPV of the expected future cash flows generated by the asset

What is Life Cycle Costing? - Economic analysis used in the selection of

alternatives that impact both pending and future costs.

- Cradle to grave costs

- Economic model of evaluating alternatives for equipment and projects.

- Assessment of long-term cost effectiveness of projects

Why Life Cycle Costing?

- Primary criteria for investment or system selection is based on Procurement costs only

Whereas

- LCC analysis is required to demonstrate that operational savings are sufficient to justify the investment costs.

LCC where and how? - Project Engineering wants to minimize capital

costs as the only criteria, - Maintenance Engineering wants to minimize

repair hours as the only criteria, - Production wants to maximize uptime hours as

the only criteria, - Reliability Engineering wants to avoid failures

as the only criteria, - Accounting wants to maximize project net

present value as the only criteria, and - Shareholders want to increase stockholder

wealth as the only criteria.

LCC is everywhere ….

- Manufacturing involving heavy investments - Asset management - Construction business - R & D investments - Military investments - Etc….

How can it help ?

- Methodical approach to real value

- LCC asks these questions

• What do I need now and how much will it cost me?

• What will I need to do in the future because I have

done it and how much will that cost me?

• How long is the ‘future’?

• How do I evaluate future costs v current costs?

What LCC needs ?

- Three requirements of LCC include :

• Relevant costs

• Time Horizon

• Discount rate

Future Cost Vs. Current Cost

- Comparing future costs with current costs can be done

using Net Present Value (NPV)

- What is NPV? The amount to be invested in the bank

today to pay for all future costs at a given interest rate

over a known time horizon.

Discount rate – The decider

- Selecting the right discount rate is crucial as it can

direct the overall decision

Note on LCC

- LCCs undergone may well form part of a larger study

that will incorporate these things

- While the larger picture is important, LCC intends

only to evaluate the best cost alternative

- Life expectancy can be - Physical - Economic - Functional - Technological - Social & Legal

At Last

- LCC is an economic evaluation method

- It is about money and the best value for money

- Helps an investor to ascertain the costs of

alternatives and make a decision

- Arrive at the Interest rate net of inflation to

estimate the present value of alternative

Case : “Bus Under frame”

The Life Cycle Costing of Stainless Steel

A practical approach to cost comparison

Decision : Stainless steel vs. Carbon steel

References

Life cycle costing video Lecture

LCC “Bus Under frame” Case Study

Google Books : Life Cycle Costing : Techniques, Models and Applications

Wikipedia Links : 1 , 2 , 3

And most importantly, Google !!!

Remember..

Thank you!