Life Cycle Costing Flashcards
LCC - Definition
Compilation and assessment of the costs in each stage of the life cycle of a product that are covered by one or more of the actors.
The different cost factors are investigated based on current and/or future costs.
Uses of LCC
- Aid in the decision making process and identify hotspots
For customers:
- Evaluate and compare alternative products.
- Assess economic viability of projects or products.
For product suppliers:
- Optimize product design by evaluation of alternatives and by performing trade-off studies.
- Evaluate various operating and maintenance cost strategies (to assist product users).
Costs - Definition
Monetary value of goods and services that producers and consumers purchase.
In LCC (with LCA approach) costs must be related to real money flows.
LCC - Historical background
LCC was first used by the Department of Defense of the US in the mid-1960s. It was applied to the procurement of military equipment.
Costs to be included
- Acquisition
- Transport
- Operation and maintenance
- Disposal
- Residual value
Total Cost of Ownership
Concept from the business sector.
Determines the total costs (direct and indirect) throughout the life cycle of a product or service, up till the preparation of the location of facilities for a next economic use.
It examines the cost associated with purchased goods and services throughout the entire supply chain.
LCC in Procurement
It is a way of visualizing hidden costs, which are by no means negligible, and bringing them into the procurement decision moment.
Cost elements for equiments
- initial cost *equipment of unit process)
2. Operation and maintenance cost
Initial costs
- Design and development cost
- Investment on asset or cost of equipment
- Installation cost or erection and commission cost
Operation and maintenance costs
- Labour cost
- Energy cost
- Spare and maintenance cost
- Raw material cost
These costs can be higher than the initial costs –> they affect more the entire cost of Product Functional Unit.
Steps of LCC
- Definition of goal and scope (system boundaries, functional unit, stakeholders…)
- Life Cycle Costing Inventory - internal costs
- Life Cycle Costing Inventory - external costs
- Calculate LCC by adding all cost element for Functional Unit
- Interpretation of the results.
Steps of LCC - Definition of goal and scope
Determination of life cycle of the product.
Life cycle isn’t the same as Product Life Cycle.
Product life cycle is a marketing concept. It is the time span based on demand of the product in the market, starting from launch of the product up to the time when the company withdraws the product from the market.
Steps of LCC - Inventory
Calculation of monetary value for each input and output of the process.
- Internal costs
- External costs
- Calculate LCC by adding all cost element for functional unit, considering also the revenues of the product.
Internal costs
Someone (a producer, transporter, consumer or other directly involved stakeholder) is paying for the production, use or end-of-life expenses and, thereby, it can be connected to a business cost and liability.
This concerns all the costs and revenues within the economic system.
Types of capitals
- Financial capital: financial resources, they’re often insufficient to accurately measure natural and social capital.
- Natural capital: natural resources
- Social capital: social resources
External costs or Externalities
They include the monetized effects of environmental and social impacts not directly billed to the firm, consumer or government that is producing, using or handling the product.
They’re outside the economic system, though inside the natural and social system.
Externalities are indirect costs or environmental / social potential costs (things that don’t exist in the present, like future taxes).
