What is cost Objectives?

A cost object is any item for which costs are being separately measured. It is a key concept used in managing
the costs of a business.
Here are some types of cost objects:

Output. The most common cost objects are a company's products and services, since it wants to know
the cost of its output for profitability analysis and price setting.
Operational. A cost object can be within a company, such as a department, machining operation,
production line, or process. For example, you could track the cost of designing a new product, or a customer
service call, or of reworking a returned product.
Business relationship. A cost object can be outside of a company - there may be a need to accumulate
costs for a supplier or a customer, to determine the cost of dealing with that entity. Another variation on the
concept is the cost of renewing a license with a government agency.
It may be necessary to have a cost object in order to derive pricing from a baseline cost, or to see if costs are
reasonable, or to derive the full cost of a relationship with another entity.
A cost object may be the subject of considerable ongoing scrutiny, but more commonly a company will only
accumulate costs for it occasionally, to see if there has been any significant change since the last analysis. This
is because most accounting systems are not designed to accumulate costs for specific cost objects, and so must
be reconfigured to do so on a project basis. An annual review is common for many cost objects. If an analysis is
especially complex, the review may be at an even longer interval.

Cost Object Explained

Definition, Meaning, and Usage
In the accountant's view, every item in the budget or in the accounting system that has a cost figure of its own
may be called a cost object.
Cost object is a term used in budgeting, planning, and accounting, referring simply to any item associated with
a cost figure of its own.
The term can be applied a very wide range of items whose costs may be found by estimation, by direct
measurement, or by allocation or apportionment. Cost object items may include, for instance:

Services (e.g., consulting services with a specified cost).

Goods (e.g., raw materials for product production).

Products (e.g., a product whose cost of design, development, and production is specified).

Projects (e.g., a product design project).

Customers (e.g., a customer for whom the cost of selling or the cost of service delivery is specified).

Contracts (e.g., a warranty support contract, whose cost of creation and delivery is specified).

Resources (e.g., fuel used to operate vehicles, with a specified cost).

Activities (e.g., Using a vehicle to deliver goods, at a specific cost).

The list of kinds of cost object items could extend indefinitely. A cost object is not the same thing as an account
from the organization's chart of accounts.

An account is a place holder for a category of financial transactions. A chart of accounts might contain,
for instance, an expense category account for office supplies. Transactions are entered into these and other
kinds of accounts as debits or credits. At the end of the accounting period, a total is reported for each
transaction category (i.e., for each account).

A cost object is a specific instance of an item, whose cost can be given, either by estimation, cost
allocation, or direct measurement. Office supplies for a specific division, for a specific period of time, are a
cost object if a cost figure for these supplies can be measured or otherwise assigned.

The identification and costing of cost objects is central to budgetary planning, where planners will consider both
actual historical costs for sets of cost objects (e.g., office supplies or employee salaries), and likely future cost
needs for the same cost objects.
The identification and costing of cost objects supports the preparation of financial accounting reports. The
identity of cost objects (e.g., factory labor) and the way they are used (e.g., either in direct product production
or as indirect manufacturing support) determine which accounts are impacted and the figures reported.

Understanding Cost Objects

Cost objects represent cost information about products, customers, and channels. They are the final results of
the activities performed by your businessthe focal points of costing and profitability analysis.
You already added product, customer, and channel data to your central repository of informationthe
Operational Warehouse - Enriched (OWE). In addition, you may have defined trees for the customer, product,
channel, and department cost object types. Using Activity-Based Management, you can use these trees for the
Activity-Based Management engine's cost object roll-up.
Understanding Cost Object Use
A primary cost object is the final customer, product, or channel. This is the object about which you want to
derive cost or revenue information. Use a secondary cost object for costing components of a final customer,
product, or channel.

Understanding Cost Object Groups

There are three cost object groups:

Single-dimensional

Multidimensional

Sustaining

Understanding Single-Dimensional Cost Objects

A single-dimensional cost object exists in a single Activity-Based Management dimension. Select a single,
common dimension for each combination of activities and cost objects. The single-dimensional approach
assures that every activity relates to a customer, product, or channel. These are linked through activity drivers
to a corresponding customer, product, channel, or department cost object, letting you accurately measure costs.
Image: Example of single-dimensional cost objects
Single-dimensional costing preserves the cause and effect relationship between activities and cost objects as
shown in the following illustration.

Understanding Multidimensional Cost Objects

A multidimensional cost object often referred to as transaction costing is a combination of two or more
Activity-Based Management dimensions such as those involved in a transaction. Multidimensional cost
objects are useful in service-based organizations, such as banks, where costs are not easily defined as
belonging to a customer, product, channel, or dimension. Many costs actually represent the point where
multiple dimensions intersect. For example, when customer withdrawals money from a bank's ATM, the
specific transaction takes place at the intersection of three dimensions as shown in the following illustration.
Image: Example of a multidimensional cost object
Example of a multi dimensional cost object.

Because you can derive multidimensional cost objects from transaction tables that record customer, product,
and channel dimensions, metadata can group certain characteristics together to establish a costing basis. Using
metadata to define table and data structures provides flexibility in developing models for your business since
doing so lets you create multidimensional cost objects that you can use for costing.
Understanding Sustaining Cost Objects
The cost object supports the overall dimension or organization. Product-sustaining cost objects enable the
production of individual products or services. Customer-sustaining cost objects let an organization sell to an
individual customer, but are not independent of the volume or mix of the products and services sold and
delivered to the customer. You can easily trace sustaining cost objects to the customer, product, or service for
which the cost objects are performed. However, the quantity of resources used in the product- and customersustaining cost objects is independent of the production and sales volumes and quantity of production batches
and customer orders.
Defining Cost Objects
Use the Cost Objects page to set up cost objects.
When adding cost objects using the Cost Objects search page, if you select Integrate Cost Object, you must
have already set up the object to which the cost object refers in the Operational Warehouse - Enriched (OWE).
For example, if you set up a cost object called PENCIL, it must already exist in the Product table
(PRODUCT_D00); otherwise, it does not display in the Cost Object ID list.
Pages Used to Set Up Cost Objects
Page Name

Definition
Name

Navigation

Usage

Cost Objects

CST_TBL1

select Activity Based Management, then select

Setup, then select Cost Objects, then select
Cost Objects

Set up cost objects

for your model.

Cost Object
Description
Long

CST_TBL2S

Click the Information button on the Cost

Objects page.

Enter a long
description of the
cost object.

Cost Objects Page

Use the Cost Objects page (CST_TBL1) to set up cost objects for your model.

Navigation
Select Activity Based Management, then select Setup, then select Cost Objects, then select Cost Objects
Enter a Set ID, Cost Object Group, Dimension, and Cost Object ID. (If Integrate Cost Object is selected, this
cost object must be set up in the OWE).
Image: Cost Objects page
This example illustrates the fields and controls on the Cost Objects page. You can find definitions for the
fields and controls later on this page.

Description

Enter a description of the cost object.

(Optional) Click the Information button to enter a long description of the cost
object.

Cost Object Use

Select the cost object use. Values are:

Primary: Select to have the cost object be the final customer, product, or
channel (or other object). This represents the object for which you want to
derive cost or revenue information.
Secondary: Select to have the cost object be used when you are costing
components of a final customer, product, or channel. For example, if a product
consists of two separate components, you may want to treat each as a
secondary cost object. To obtain the cost of the total product, assign each
secondary cost object to a primary cost object that represents the combined
product. Selecting this value makes the Sustaining and Targetcheck boxes
unavailable for entry.

Multi-dimensional

Select to specify that the cost is a combination of two or more dimensionsa

customer, a product, or a channelsuch as a transaction.

Single Dimensional

Select to specify that the cost object exists in a single dimensioncustomer,

product, or channel.
Note: If you are adding a new single-dimensional cost object using the Cost
Objects search page, select the Cost Object Group and Dimension customer,
product/service, channel, or department.
Select if the Primary cost object supports the overall business, cannot
reasonably be attributed to one or more dimensions, or does not generate
revenue.

Sustaining

Select if this Primary cost object is a target

Target
Reviewing Cost Objects

Review cost object setup by using the Cost Object Listing inquiry page, which lists the cost objects and
settings by SetID or by generating the Cost Object Listing report (ABC2008) that you can either run for all
cost objects in a SetID or for just a specific cost object ID.
Pages Used to Review Cost Objects

Page Name

Definition Name

Navigation

Usage

Cost Object
Listing
inquiry

CST_LIST_VW1

select Activity Based Management, then select

Setup, then select Cost Objects, then select
Cost Object Listing

Review a list of cost

objects by SetID.

Cost Object
Listing
report

RUN_RAB_2008

select Activity Based Management, then select

Reports, then select Cost Object Reports, then
select Cost Object Listing

Generate the Cost

Object Listing report
(ABC2008).

Cost objects: direct and indirect costs

Managerial accounting is the art of planning, decision making and controlling in business. In order to do that,
we must identify what we want to track. Are we looking at a product, a store, a department within the company,
or even a customer? Since managerial accounting gives us so much flexibility, we need to make sure we
understand to what we want to assign costs.

A cost object is anything for which a company wants to assign costs. Cost objects can take many different
forms including:
1.
2.
3.
4.
5.
6.
7.
8.

Individual units of a product

An order for a specific customer
A product line
A department within the company, like the marketing or human resources department
A geographic segment of the business
A store
A service provided by the company
A customer

There is almost no limit to what you can identify as a cost object as long as you can find a way to assign costs to
it. The most important aspect of determining a cost object is the ability to assign costs in order to get a complete
picture to plan, make decisions and perform controlling activities. If you cannot fully assign costs to the object,
you may want to consider if the object chosen is the correct one. In most cases, we can find ways to assign
costs, however.
Direct and Indirect Costs
All costs related to a cost object are either direct costs or indirect costs.
A direct cost is a cost that is easy to trace to a cost object. For an accounting or law firm, it is easy to trace the
number of hours and cost of working on a client because all staff is required to assign their time to clients
throughout the work week. Engines used in a Boeing 747 are easy to trace to each plane and therefore the cost is
easy to calculate. The salaries for marketing employees are easy to trace to the marketing department of a
company. Direct costs are assigned to a cost object easily.

An indirect cost is a cost that must be allocated to a cost object because it cannot be directly traced to the cost
object. The cost of a receptionist in an accounting firm is hard to allocate to individual clients because his or her
time is not being tracked by client. Supervisors at the Boeing plant are supervising employees working on
several different projects and it is impractical to track his or her time to each individual plane. Some materials
are so insignificant that the cost of tracking how much glue goes into a product outweighs the benefit of
knowing the cost of glue per unit.
Sometimes it is possible for a cost to be a direct cost for one cost object and an indirect cost for another object.
For example if my cost object is the marketing department, costs associated with marketing salaries are direct
costs which are easy to assign to the marketing department. However, if the cost object is one of 20 products a
company manufactures, the marketing salaries are an indirect cost for that product since the cost is not easy to
trace back to our cost object.

What is cost driver?

A cost driver is any activity that causes a cost to be incurred.
Cost driver is a cost accounting term. A business engages in many different activities. The cost driver for an
activity is the factor that influences the amount of the resources that will be consumed by a particular activity. A
cost driver is designed to allocate the activity cost pool (or related costs) to the cost objects.
1. The activity is the work that is done.
2. The resource is what the activity uses to do the work, i.e., people, equipment, services. Resources cost
money.
3. The cost of the activity depends on the quantity of resources used to accomplish the activity.
4) The cost object is whatever it is you wish to cost. It could be a product, service, process, job or customer.
Example:
One part of the Ace Trucking's business operation involves making deliveries by truck. The activity is
delivering goods. The costs of this activity include the truck drivers wages, fuel, depreciation of the truck,
insurance, etc. The quantity of the resources that will be consumed by this activity are influenced by the number
of deliveries made per year. Hence the cost driver could be the number of deliveries.
A cost driver is the reason why the cost is incurredin other words, the cost is incurred in producing the driver.
A Cost Driver is any activity that causes a cost to be incurred. The Activity Based Costing (ABC)
approach relates indirect cost to the activities that drive them to be incurred. In traditional costing the
cost driver to allocate indirect cost to cost objects was volume of output.

How to Determine Cost Drivers

Cost drivers are characteristics of activities or events that cause a business to incur costs. The cost at issue often
is referred to as the cost object. By analyzing cost drivers, businesses can better understand the correlation
between costs incurred and the activities that cause them. Furthermore, a cost driver provides the basis for cost
allocation among business units that directly benefit from the cost incurred. A cost object may appear related to
different activities, but in determining cost drivers, a business must choose those that correlate mainly with the
cost object, best facilitate management control and are the easiest for cost measurement.
Step 1
Identify the cost object. To determine cost drivers, a cost object must be first identified. The purpose of having a
cost driver is to better distribute the cost of a target cost object among its cost beneficiaries. For example, for a
business that encounters regular material handling tasks, how to better allocate its total material-handling cost to
different working units could be challenging. Here the material handling cost is the cost object. Having set the
target cost object, the business can then determine a cost driver to help distribute the total material handling cost
to different working units.
Step 2
Investigate potential cost drivers. A valid cost driver must reflect the causal relationship between a specified
activity and the cost incurred. Using the same material handling example, the working units may track their
work in terms of the total number of boxes of materials handled or total weight of the materials handled. The
number of boxes of materials moved and the weight of materials handled are two ways of quantifying the

material-handling activities, and management may consider them as alternative cost drivers. Determining a cost
driver among potential options depends on how well each cost driver may correlate with the cost object,
contribute to management control and provide cost measurement.
Step 3
Determine cost driver correlation. In the material-handling example, management identified two potential cost
drivers, suggesting that material-handling costs for each working unit be measured either by the number of
boxes of materials moved or the actual weight of the materials handled by a unit. If the materials handled are
homogeneous and packed in boxes of the same size, each unit would incur an equal handling cost for every box
of material handled. If the materials are different in content and packaging sizes, a unit that handles a large box
of heavy material would likely incur a higher handling cost, such as requiring more labor, than a unit that
handles a small box of light material. This makes it unfit to use the number of boxes handled to measure
material handling cost. In comparison, material weight as a cost driver is more closely correlated to material
handling cost.
Step 4
Analyze the management control effect. Choosing the right cost driver may positively affect management
control. In the material-handling example, if total material handling cost was allocated to individual working
units based on the number of boxes of materials moved by each unit, a unit that handles many small boxes
would be assigned a higher cost than it actually incurred and a unit that handles few large boxes of materials
would be assigned a lower cost than it actually incurred. This essentially would cause one unit to burden and
subsidize certain cost for another unit. Consequently, the small-box unit wouldn't have a working incentive,
because the more boxes it handles, the more cost it would unfairly incur -- a potential management-control
problem. Using material weight as the cost driver allows equal and fair cost distribution for all units.
Step 5
Conclude on cost measurement. To determine cost drivers, management must also consider whether the cost
measurement provided by a potential cost driver is both accurate and easy to use. While using the number of
boxes to measure material handling cost is the easiest way, using it as a cost driver doesn't provide credible cost
correlation, nor motivate working behaviors. Although material weight is a more accurate cost driver, it could
be further refined. If some materials require better care to handle than others, even handling materials of the
same weight may not incur the same cost. However, to add another dimension such as material types to cost
measurement would make cost allocation harder to implement. The reason businesses resort to cost drivers and
cost accounting for managing costs is to better use limited resources, rather than devoting more resources to
develop complex cost measurements.

What is Life Cycle Costing?

Introduction
This Life Cycle Costing Tool has been developed to assist asset managers in decision making based
on performing a systematic assessment of the life cycle costs of selected water and wastewater
assets.
Life Cycle Costing
Owners, users and managers need to make decisions on the acquisition and ongoing use of many
different assets including items of equipment and the facilities to house them. The initial capital
outlay cost is usually clearly defined and is often a key factor influencing the choice of asset given a
number of alternatives from which to select.
The initial capital outlay cost is, however, only a portion of the costs over an assets life cycle that
needs to be considered in making the right choice for asset investment. The process of identifying
and documenting all the costs involved over the life of an asset is known as Life Cycle Costing (LCC).
The total cost of ownership of an asset is often far greater than the initial capital outlay cost and can
vary significantly between different alternative solutions to a given operational need. Consideration of
the costs over the whole life of an asset provides a sound basis for decision-making. With this
information, it is possible to:

Assess future resource requirements (through projection of projected itemized line item costs
for relevant assets);

Assess comparative costs of potential acquisitions (investment evaluation or appraisal);

Decide between sources of supply (source selection);

Account for resources used now or in the past (reporting and auditing);

Improve system design (through improved understanding of input trends such as manpower
and utilities over the expected life cycle);

Optimize operational and maintenance support; through more detailed understanding of input
requirements over the expected life cycle)

Assess when assets reach the end of their economic life and if renewal is required (through
understanding of changes in input requirements such as manpower, chemicals, and utilities as
the asset ages).
The Life Cycle Costing process can be as simple as a table of expected annual costs or it can be a
complex (computerized) model that allows for the creation of scenarios based on assumptions about
future cost drivers. The scope and complexity of the life cycle cost analysis should generally reflect
the complexity of the assets under investigation, the ability to predict future costs and the
significance of the future costs to the decision being made by the organization.
A life cycle cost analysis involves the analysis of the costs of a system or a component over its entire
life span. Typical costs for a system may include:

Acquisition costs (or design and development costs).

Operating costs:

Cost of failures
Cost of repairs
Cost for spares
Downtime costs
Loss of production
Maintenance costs:
Cost of corrective maintenance
Cost of preventive maintenance
Cost for predictive maintenance

Disposal costs.

A complete life cycle cost projection (LCCP) analysis may also include other costs, as well as other
accounting/financial elements (such as, interest rates, depreciation, present value of money/discount
rates, etc.).
For the purpose of this Tool, it is sufficient to say that if one has all the required cost values (inputs),
then a complete LCCP analysis can be performed readily in a spreadsheet, since it really involves
summations of costs for several options and computations involving discount rates. With respect to
the cost inputs for such an analysis, the costs involved are either deterministic (such as acquisition
costs, disposal costs, etc.) or probabilistic (such as cost of failures, repairs, spares, downtime, etc.).
Most of the probabilistic costs are directly related to the reliability and maintainability characteristics
of the system.
Why is Life Cycle Costing Important to a Utility?
An important component of a Utilitys activities is prioritizing the Capital Improvement Program, so
that it can meet its most pressing needs. This prioritization occurs at the end of the capital project
development process, which consists of Project Identification/Initial Validation, Risk Reduction, and
Life Cycle Cost analysis, all of which are used to establish the final Business Case for each project. As
can be seen in Figure 1, the Life Cycle Cost analysis is undertaken as part of the Business Case
preparation.

The Life Cycle Cost analysis allows the Utility to examine projected life cycle costs for comparing
competing capital and O&M project solutions and allows for appropriate comparison of alternatives of
different capital values, and lengths of time.
Given the condition of the Utilitys assets, the amount of capital available from the budget, and
historical evidence, the project manager must decide which project alternatives will incur the least
life cycle costs over the life cycle of the assets involved while delivering performance at or above a
defined level. As a result, this analysis will enable the Utility to:

make decisions for capital and O&M investments based on least life cycle costs,
rank each of the projects based on total cost of ownership,
combine the costing data with the Project Validation (See the Capital Project Validation and
Prioritization Tool for an in-depth discussion of project validation concepts and practices) and
Risk Reduction (See the Business Risk Exposure Tool for an in-depth discussion of risk) scores to
prioritize the projects,

make more informed decisions, and

allow better reporting to key stakeholders.

A thorough Life Cycle Cost analysis yields a higher level of confidence in the project decision, which is
part of the Project Validation calculation. Combined with a Risk Reduction analysis to identify the risk
reduction of various alternatives considered, the information from Life Cycle Cost preparation is
summarized in a business case, providing a consistent approach to the review of projects.

Life Cycle Costing Methodology Used For This Tool

The life cycle of an asset is defined as the time interval between the initial planning for the creation
of an asset and its final disposal. This life cycle is characterized by a number of key stages:

Initial concept definition;

Development of the detailed design requirements, specifications and documentation;

Construction, manufacture or purchase;

Warranty period and early stages of usage or occupation;

Prime period of usage and functional support, including operational and maintenance costs,
with the associated series of upgrades and renewal;

The disposal and cleanup at the end of the assets useful life.

As shown in Figure 2, there are day-to-day, periodic and strategic activities that may occur for any
asset. The asset life cycle begins with strategic planning, creation of the asset, operations,
maintenance, rehabilitation, and on through decommissioning and disposal at the end of the assets
life. The life of an asset will be influenced by its ability to continue to provide a required level of

service. Many assets reach the end of their effective life before they become non-functional
(regulations change, the asset becomes non-economic, the expected level of service increases,
capacity requirements exceed design capability). Technological developments and changes in user
requirements are key factors impacting the effective life of an asset.
Objectives of the Methodology
Life cycle costing (note: the terms life cycle costing and life cycle cost projections are used
interchangeably in this Tool) analysis can be carried out during any phase of an assets life cycle. It
can be used to provide input to decisions regarding asset design, manufacture, installation,
operation, maintenance support, renewal/refurbishment and disposal.
The objectives of life cycle costing are:

Minimize the total cost of ownership of the Utilitys infrastructure to its customers given a
desired level of sustained performance;

Support management considerations affecting decisions during any life-cycle phase;

Identify the attributes of the asset which significantly influence the Life Cycle Cost drivers so
that the assets can be effectively managed;

Identify the cash flow requirements for projects.

Estimating Life Cycle Costs

The life cycle cost of an asset can be expressed by the simple formula:
Life Cycle Cost = initial (projected) capital costs + projected life-time operating costs + projected
life-time maintenance costs + projected capital rehabilitation costs + projected disposal costs projected residual value.
Note the prominent role of projected costs versus historic (actual) costs in analyzing life cycle costs;
due to its forward looking best guess nature, life cycle costing is at least as much systematic art
as it is analytical technique.
Impact of Analysis Timing on Minimizing Life Cycle Costs
A major portion of projected life cycle costs stems from the consequences of decisions made during
the early phases of asset planning and conceptual design.
It is the early decisions made during the design of an asset, definition of operations and maintenance
requirements, and setting of the operating context of the asset that commit a large percentage of the
life cycle costs for that asset.
Figure 3 provides an indication of the level of cost reduction that can be achieved at various stages of
the project. It shows that as a project moves from strategic planning that the majority of decisions
have been made that provide the majority of the cost to the project.

The best opportunities to achieve significant cost reductions in life cycle costs occur during the early
concept development and design phase of any project. At this time, significant changes can be made
for the least cost. At later stages of the project many costs have become locked in and are not
easily changed. To achieve the maximum benefit available during this stage of the project it is
important to explore the following:

A range of alternative solutions;

The cost drivers for each alternative;

The time period for which the asset will be required;

The level and frequency of usage;

The maintenance and/or operating arrangements and costs;

Quantification of future cash flows;

Quantification of risk.
The concept of the life cycle of an asset provides a framework to document and compare alternatives.
Selecting Potential Project Alternatives for Comparison
The intervention (or treatment) alternatives available to be considered include:

Do-nothing - The Do-Nothing option is literally not investing any money on any form of
maintenance or renewal, including that recommended by the design engineer or OEM vendor.
This alternative is generally intended to set a conceptual baseline for asking the question: What
value does what we do now or what we plan to do add to extending the
life/functionality/reliability of the asset over doing nothing at all? Another way of looking at the
core question posed here is, Why should we continue to do what we do or are anticipating
doing? There are rather rare occasions when Do Nothing is a valid applied approach such as
when an asset is due to be replaced or shut down in short order and additional
maintenance/capital investment is irrelevant to keeping it running for the short period before it is
to be decommissioned.
Status Quo - The Status Quo option is defined as maintaining the current operations and
maintenance behavior typically that defined by the manufacturer or the design engineer. It is
the realistic baseline case against which other alternatives are compared.

Renewal (Major Repair, Rehabilitation or Replacement) - Assessment of different

rehabilitation or replacement strategies requires an understanding of the costs and longevity of
different asset intervention strategies. Each strategy is costed for the expected life of that
strategy, converted to an equivalent present worth, adjusted for varying alternative life lengths,
and compared to find the least overall cost.
Non-Asset Solutions - In certain circumstances the non-asset solution (providing the same
level of service without a major additional investment) can be a viable alternative (for example,
using pricing strategies to reduce the consumption of water).
Change Levels of Service - Most life cycle costing assumes a constant Level of Service
across options being compared. When such is not the case (which is not infrequent in reality),
comparisons across alternatives with different levels of service (that is, different levels of benefit)
must intro duce a projected benefits section for each alternative in addition to the cost
projections. This, of course, takes the analysis into the realm of benefit cost analysis (see the
Benefit Cost Tool for much more discussion and tool support).

Dispose - Disposal of the asset is retiring the asset at the end of its useful life. Perhaps the
function or level of service originally desired from the asset is no longer relevant.
It is unlikely that all seven of the alternatives listed above are feasible for each analysis; rather than
waste money on obviously irrelevant options, the practitioner is encouraged to reduce the analyzed
set to only those that are thought to be feasible.
The Effect of Intervention
A single intervention option for the entire life cycle is not likely to be the best approach to maximizing
the life extension for an asset. Multiple strategies and options will need to be studied to determine
the optimal strategy or combination of strategies for maximum life extension.
Optimal Renewal Decision Making uses life cycle cost analysis as a core Tool for determining the
optimum intervention strategy and intervention timing. See the End of Asset Life Reinvestment Tool
or the Remaining Effective Life Tool for further discussion of concepts and practices in estimating the
optimal time in the life cycle for reinvestment.
Estimating Future Costs
Knowing with certainty the exact costs for the entire life cycle of an asset is, of course, not possible;
future costs can only be estimated with varying degrees of confidence. Future costs are usually
subject to a level of uncertainty that arises from a variety of factors, including:

The prediction of the utilization pattern of the asset over time;

The nature, scale, and trend of operating costs;

The need for and cost of maintenance activities;

The impact of inflation;

The opportunity cost of alternative investments;

The prediction of the length of the asset's useful life.

The main goal in assessing life cycle costs is to generate a reasonable approximation of the costs
(consistently derived over all feasible alternatives), not to try and achieve a perfect answer.
As rehabilitations and or replacement of assets occur during the life cycle, adjust both operations and
maintenance costs appropriately. Both maintenance and operations costs are likely to materially
increase as the asset ages. The pattern of increase will vary by asset type and operational
environment [on many assets, as the asset ages, it requires an increasing number of visits per year
by the maintenance team, longer time while at the asset to execute the work order, and often a
higher level of maintenance staff to be deployed; these costs are both real and material and can be
simply modeled in a spreadsheet (see the End-of-Asset-Life Reinvestment Tool for further
discussion and demonstration)]. The timing of the rates of increases in the flow of costs over time

are instrumental in determining total life cycle costs and can substantially impact the outcome of the
investment decision. It is therefore important to:
1. Be systematic, realistic and detailed in estimating the future flow of real costs
2. Document in a notes section what the assumptions are
Inflation is likely to occur but should be taken into account in the discounting of future costs (see
next section).
The Management of Cash Flow
The application of Life Cycle Cost analysis to find that alternative with the lowest life cycle costs is
important, but there will also likely be organizational cash flow issues that need to be considered.
There will always be competing demands for the available cash resources of the organization at any
given time. Management of cash flow is simplified if the pattern is predictable over the long term. It
is conceivable that the lowest cost solution might not be the best solution from the aggregate cash
flow perspective.
Life cycle analysis provides a sound basis for projecting cash requirements which can assist the Chief
Financial Officer in managing the cash cycles of the organization.
The Life Cycle Cost Projection Tool
The web based LCCP Tool developed as part of this WERF project is perceived as being at the
forefront of life cycle costing analysis practices in the global water industry.
The focus of the establishment of this Tool has been on making it web based and enabling its usage
by utility asset managers in the US many of whom may be unfamiliar with the concept of life cycle
costing in a formal methodological framework.
The Tool is designed to be interactive where a utility manager can either follow the LCCP process on a
sequential step by step basis or, where a utility manager already understands the concepts of LCC,
the Tool can be used to provide more detailed information on a particular aspect of the analysis.
LCCP Tool Structure
Users of the Tool should follow the flow chart through the various sequential steps of creating a life
cycle cost analysis profile. At each step the user is able to access knowledge relevant to the particular
step. The steps in the Tool are:

Step 1 Define Project Basics

Step 2 Develop LCCP Data For Each Project Option

Step 3 Analyze Each Option

Step 4 Document Analysis

Step 5 Review and Finalize LCCP Projections

The Tool has been structured to enable the user to sequentially follow a process to assist in preparing
life cycle cost projections for several alternatives.