Table of Contents

Introduction   1

  Functions of LCC  1

  Discussion of LCC  3

  Conclusion  7

  References  II

I

Introduction

Sustainability is developing in as important target for an increasing number of industries and governments. Especially in a faster moving world, which is determined by quarterly period reports, a long term orientation can be a competitive advantage for unlisted companies. In the 1960´s by the US Department of Defense began to develop a tool to handle increasing costs. They recognised that the purchase price was not the only important criteria. Training or maintaining costs had to be considered for the total cost calculation, too. However, several definitions of Life cycle costing (LCC) exist that tend to be similar: ’monitoring the cost incurred throughout a product’s life cycle’ (Woodward, 1997) or ‘LCC is the sum of all costs incurred during the life cycle of a building, system or product. It includes the costs of the project, development, acquisition, operation, conservation and maintenance and salvage value if it exists.’ (Goralczyk, and Kulczycka, 2005). In the following essay several functions of life cycle costing will be drawn up. Furthermore, advantages, disadvantages and criticism of this procedure will be analysed.

Functions of LCC

LCC is a methodology which is used to provide a more comprehensive view of costs. Figure 1 shows the relationship between LCC, Full Cost Accounting and Total Cost Accounting.

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Thereby all initial and working expenses are summed up into one economic figure. In addition the tool offers the possibility to contrast investments from the very beginning to the end. Future costs are discounted back to the present to make it comparable and therefore allows the evaluation of these alternatives (Cole, Sterner, 2000). That means that by using LCC a company gets the possibility to influence future product costs, for instance through modification of the use of the product itself, at a very early stage. LCC enables firms to comprehend the interaction of different materials or other cost items during the whole life cycle process. As an example engineers increase the durability of a machine but in return the cost for higher quality materials could increase. Hence, through these circumstances a broad and specified analysis of causes and effects can take place. Provided with this total overview of life cycle costs, further savings and optimisations like outsourcing are possible.

Consequently the focus of the costing system changes with the life stage of the product. An organisation with a product at an early development stage will use LCC as a planning tool. However, a product in a mature stage needs more to be controlled than to be planned. The kind of control varies from enterprise to enterprise. One organisation will estimate the control of actual and budgeted costs, others will rate the understanding of costs related to environmental effects higher. Together with profitability assessment and the facilitating of decisions, the importance of these objects fluctuates over the different phases (Dunk, 2004). To fulfil these claims LCC can not be a static accounting tool, it should be more interpreted as a dynamic framework which delivers the right information for decision makers at altered life cycle periods. Figure 2 shows the shift of tasks in detail.

Figure 2: Change of Focus during a Product Life Cycle

Source: Lindholm and Suomala, 2007

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