HISTORY AND BACKGROUND OF LIFE CYCLE COSTING (LCC)

The history of LCC began in the US Department of Defence in the mid-1960s. In the
mid-1980s attempts were made to adapt LCC to building investments. Recently several
research projects have been carried out aimed at developing the LCC methodology for the
construction industry and placing LCC in an environmental context.
There are some examples shows the LCC approach. Firstly, Abraham and
Dickinsons study of the disposal of a building in which LCC calculation is used to quantify
disposal costs. Secondly, Sterner developed a model for the evaluation of tenders, where
she uses LCC methodology to calculate the total energy costs for buildings. Thirdly, Aye et
al. used LCC to analyse a range of property and construction options for a building. Lastly,
BogenstGatter advocate the usability of performing an LCC calculation in the early design
phase. He developed a model using specific characteristic values of LCC, i.e. standardised
typological figures. He suggests defined specifications from similar buildings as key solutions
to the usability problem.
LCC concepts is helps the management to understand the cost consequence of
developing and making a products and to identify areas which cost reduction efforts are
likely to be most effective. The process of LCC fundamentally involves in assessing cost
arising from an assets over its life cycle and evaluating alternatives that have impact on this
cost ownership. LCC is usually useful to apply to low technology issues, such as repair and
versus replace decisions.

DEFINITION OF LIFE CYCLE COSTING

Life cycle costing is a cost management approach which includes all costs and
ensures that all costs are managed over the life cycle of the product. Product life cycle
begins from conception of the product until its abandonment which can be referred as from
a cradle to grave.
Product life cycle has four stages:
1.
2.
3.
4.

Product planning and initial concept design

Product design and development
Production
Distribution and customer (or logistical) support

All expenditure for resources that are likely to arise must be addressed. Future costs
are also taken into consideration and will be discounted to the present value. LCC includes
all the upstream costs and downstream costs. Upstream costs involved in producing a good
include research and development costs, such as salaries paid to research engineers.
Downstream costs refer to costs that incurred later in the product lifecycle. These include
marketing and advertising costs. All costs and savings can be directly compared and fullyinformed decisions can be made.
LCC could prevent losses from project abandonment or suspension in work in
progress due to insufficient funds. By using LCC, all expenditure will be taken into account
hence, all the expenditures will be fully disbursed as and when the product life cycle ends.

PRODUCT LIFE CYCLE STAGES

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The graph below illustrates life cycle costs and cost commitment for a typical product.
Accumulated/pr
oduct life cycle
cost (%)
10
0

Committed
cost

7
5
5
0

Incurred
cost

Product
planning &
concept
design

Design &
developme
nt

Production

Distribution
& customer
support

Product
life cycle
phases

From the graph above, committed cost refer to cost that may be incurred in the future
due to decision that have already been made at the earlier stage. On the other hand, cost
incurred refer to cost that have been incurred when the resources is used.
The first stage in the product life cycle are product planning and initial concept
design. It involves process of identifying any underlying conditions, assumption, limitations
and constraints such as minimum asset performance and maximum capital cost that might
be restrict the range of acceptable opinions to be evaluated. It is a valuable reference for
better decision whether the plan should be carried on or otherwise. Cost that may be
incurred during this stage are R&D cost and market research cost.
The second stage is product design and development. This stage starts from
preparation of the development contract until the product is ready to be introduced to the
business. The factory trials will be take place during this stage. Cost that may be incurred at
this stage are cost of product design, prototyping and market testing cost.

The next stage is production which the process to transform the resources into
completed product. Cost that may be incurred during this stage are all the manufacturing
costs related to produce the products such direct material, labour, overhead and
administrative cost.
While the last stage of product life cycle is distribution and customer (or logistical)
support which the stage where the product are sent to customers and ready to be used.
During this stage, the management will incur the marketing, selling and distribution costs.
Other than that, they will also incur for logistical support cost such as delivery and
transportation cost, warehouse costs, dismantling costs, cost for abandonment of the project
and cost for equipment might need to be disposed of or recycled.

ELEMENTS OF LIFE CYCLE COSTING

The purpose of calculating this technique is to analyse all the costs that have to be
borne by the company in acquiring a new asset. According to Nijhar Charavoti (2009), this
technique serves as the decision making tool in which it combines the conflicts by
emphasizing on the facts, money and time. For example, to compute the cradle to grave
costs of an equipment, the company should include not only the purchase price (money), but
also the any costs afterwards which will be incurred (facts) throughout its lifespan (time). The
costs afterwards which are inclusive of operation costs, maintenance costs, and disposal
costs, are calculated using Net Present Value at discounted factor.
There are three elements in Life Cycle Costing which are:a

Initial costs
This element represents the acquisition cost, construction cost, installation cost and/or
design cost of equipment. These one-off initial costs will only be incurred by the company at
the beginning of the acquisition of the assets.

Operation and maintenance costs

Meanwhile, operation and maintenance costs which also include labour and training costs
will be repeatedly incurred by the company throughout the lifespan of the acquired assets.
Maintaining of the assets is necessarily required so that the asset will perform at its best
level and the company could fully utilize it. On top of that, training costs refer to the cost
incurred once by the company to equip its employees with the required skill and knowledge
pertaining to the usage of the newly acquired asset. If the asset needs to be updated
regularly, thus the employees knowledge also needs to be up-to-date so that the company
could make the full use of the asset.

Disposal costs
At the end of the economic life of the asset, there are certain costs that need to be borne by
the company, such as recycling costs and/or or dismantling costs. These costs also will be
incurred once by the company. However, if the company has decided to sell off the asset,
the company will obtain gain on disposal provided that the proceeds obtained from disposing
the asset exceeds the salvage value of the asset.

ADVANTAGES ON LIFE CYCLE COSTING

The life cycle concept results in earlier action to generate revenue or to lower costs
than otherwise might be considered. Better decisions should follow from a more accurate
and realistic assessment of revenues and costs, at least within a particular life cycle stages.
Life cycle thinking can promote long- term rewarding, in contrast to short-term profitability.
The life cycle concept helps managers to understand acquisition costs vs. operating and
support costs. It encourages businesses to find a correct balance between investment costs
and operating expenses. The life cycle costing assist managers to select the best project
option among several alternatives which ensures effective planning and prospective benefit.
On top of that, life cycle costing help management to give effective decision. It helps
management in purchasing department . Life cycle costing assess and anticipate future
resources requirement for production. Therefore, it helps management in determining what
to purchase. As a result, managers can make effective and efficient decision and redundant
purchasing can be avoided.
Last advantage is life cycle costing helps management to understand factors that
increase costs. It requires detail research on cost on each product stages involved hence,
this helps in identifying hidden cost. Life cycle costing shows all cost incurred before, during
and after production. Managers can identify costs that can reduce costs in other stages of
product life cycle. For example, by focusing cost on designing stage, the company can
reduce after sales cost such as warranty.

DISADVANTAGES ON LIFE CYCLE COSTING

Firstly, the disadvantage of life cycle costing is challenging and not an easy task. It is
because it needs more effort from management and critical decisions have to be made in
order to obtain accurate data. This is because there is lack of awareness in the management
on how to calculate life cycle costs. Secondly, it requires more time. It is time consuming to
gather information on the actual costs involved in the product life cycle from all the related
departments.
Furthermore, it is not easy to design products that have longer lives. This is due to
the difficulty in predicting the changes in external & internal environment. For examples are
customers needs and preferences, inflation effect, and impact on competitors action.
Another disadvantage is difficult to estimate operational & maintenance cost. It is difficult to
determine the discount rate as management need to compare the nominal value. Hence, it
will incur more cost and be more time consuming.
Moreover, the life cycle costing cause drop in productivity. The life-cycle costing
concept assumes an asset will be as productive in later years as it is when it's new. This may
not be the case. If a piece of equipment, for example, gradually slows down, we'll be earning
less income from it while receiving the same write-off we got when the product was first put
into production. Though this may make the steady write-off attractive as a percentage of
income earned from the asset, that write-off may not be enough to make up for the loss in
productivity.
Lastly, the disadvantages is need to paying back loans. If we borrow money to
purchase an asset, writing off equal amounts of the cost during the asset's life cycle can cost
us in interest charges. We'd fare better by writing off a larger portion of the asset during its
early years so we can save on taxes and apply the savings to paying down the loan. The
earlier we pay down a loan, the lower our interest expenses will be because interest is
assessed each month on the remaining balance.

IMPLEMENTATION OF LCC IN MALAYSIA

CONCLUSION

The management can know whether the revenue earned by the products is sufficient
to cover the costs incurred during its life cycle costing. There are opportunities for cost
reduction and minimization (and thereby scope for profit maximization). We will find out
about the costs involved at difference stages of the life cycle costing and the implications of
the life cycle costing on pricing, performance management and decision making.

REFERENCES

1) http://simple.werf.org/simple/media/LCCT/index.html
2) http://www.accaglobal.com/uk/en/student/acca-qual-student-journey/qual-resource/accaqualification/f5/technical-articles/target-lifestyle.html

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