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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!