What is Life Cycle Costing? Definition

The term “life cycle costing” (LCC) is one you may have come across in your business travels, but what does it actually mean? In short, life cycle costing is a tool used to assess the total cost of ownership (TCO) of an asset over its lifespan. This includes everything from the initial purchase price to the costs of maintaining and operating the asset, as well as any costs associated with disposing of it at the end of its life. LCC is an important tool for making decisions about which assets to purchase, as it takes into account all of the costs associated with ownership. In this blog post, we will explore the concept of life cycle costing in more detail and explain how it can be used to make better decisions about purchasing assets.

What is Life Cycle Costing?

Life cycle costing is the process of allocating costs over the entire life of an asset. This includes the cost of acquiring, operating, maintaining, and disposing of the asset. The purpose of this costing method is to provide a more accurate depiction of the true cost of an asset by taking into account all associated costs throughout its life.

There are several benefits to using life cycle costing. First, it allows for a more complete understanding of the true cost of an asset. This can be helpful in making decisions about whether or not to purchase an asset, as well as in negotiating prices. Additionally, this method can also help identify areas where cost savings can be achieved. For example, if the majority of an asset’s costs are incurred during its operating phase, measures could be taken to extend its lifespan and reduce future costs.

While life cycle costing provides many benefits, there are also some challenges associated with its use. One challenge is that it requires accurate forecasting of future costs. This can be difficult to do, especially for long-lived assets with many potential future scenarios. Additionally, this method requires significant data gathering and analysis, which can add complexity and cost to a project.

Benefits of Life Cycle Costing

There are many benefits to using Life Cycle Costing when making decisions about purchasing or maintaining products and systems. Some of the benefits are:

• LCC can help to identify the most cost-effective options when there are multiple choices.

• LCC can be used to assess whether the benefits of a proposed product or system justify the costs.

• LCC can help decision-makers understand the true cost of ownership of a product or system over its lifetime.

• LCC can provide valuable information for negotiating pricing with suppliers.

• LCC can be used to develop long-term budgets for maintaining products and systems.

How to Calculate Life Cycle Costing

To calculate the life cycle cost of a product, you need to consider all of the costs associated with its acquisition, ownership, and disposal. This includes the initial purchase price, installation and commissioning costs, operating and maintenance costs, and decommissioning and disposal costs.

The easiest way to calculate life cycle costing is to use a software tool like Excel or a dedicated life cycle costing software package. However, you can also do it manually using a pencil and paper.

Here’s a step-by-step guide to calculating life cycle costing manually:

1. Determine the expected lifespan of the product. This is the number of years that you expect to use the product before it needs to be replaced or disposed of.

2. Identify all of the costs associated with acquiring the product. This includes the purchase price, shipping and installation costs, and any other one-time expenses.

3. Determine the annual operating and maintenance costs for the product. These include things like electricity costs, consumables (e.g., replacement parts), and repairs.

4. Estimate the decommissioning and disposal costs for the end of the product’s lifespan. These can include things like removal fees, recycling costs, and landfill charges.

5. Add up all of the above costs to get your total life cycle cost estimate for the product.

Case Study: Life Cycle Costing for a HVAC System

In order to understand life cycle costing, it is first important to understand the concept of a life cycle. A life cycle is the total time span from when an entity is created until it is finally disposed of. For example, the life cycle of a car might span from the time it is manufactured until the time it is scrapped and recycled.

The important thing to note about life cycles is that they are not always linear. In other words, an entity does not always spend an equal amount of time in each stage of its life cycle. For example, a car spends a relatively short amount of time being manufactured, but a much longer time being used by its owner.

Now that we have a basic understanding of what a life cycle is, we can move on to discussing life cycle costing. Life cycle costing is a method of economic analysis that takes into account the total cost of ownership for an entity over its entire life cycle. This includes both the initial costs (e.g., manufacturing costs) and the ongoing costs (e.g., maintenance costs).

There are many benefits to using life cycle costing when making decisions about entities such as HVAC systems. First, it allows for a more accurate comparison of alternative options. Second, it helps decision-makers to identify and quantify all of the relevant costs associated with owning and operating an entity. Finally, by taking into account the costs throughout an entity’s entire life cycle, decision-makers can make more informed choices about

Conclusion

Life cycle costing is a method of assessing the total cost of ownership for a product or system. It takes into account all costs associated with acquiring, using and disposing of the item in question.life cycle costing can be used to make decisions about which products or systems offer the best value for money. It is a valuable tool for both businesses and consumers alike.