Applications of Life Cycle Costing
In capital budgetingCapital BudgetingCapital budgeting is the planning process for the long-term investment that determines whether the projects are fruitful for the business and will provide the r.
,
Benefits
It provides a precise estimate of the expected cost to be incurred over the asset’s life span.
,
Effects
The life cycle costing estimates help decision-making where a mutually exclusive option is available.
Also, the management can plan to reduce the item’s overall cost through the extension of useful life, efficient utilization, or other similar cost rationalization measures.
,
Example of Life Cycle Costing
Let us take the example of John, who wants to purchase a new car worth $12,000.
Calculate the car’s life cycle cost if John plans to sell the car after five years at a residual value of $3,000.
As per estimates, the annual expense for maintenance & repair will be $1,000, and gas consumption per year will be another $3,500.
Please consider the appli.
,
Formula
We can derive the value of whole life costing by identifying all the cost heads and their corresponding period of occurrence, then discounting them to the present value, and then adding them up while deducting the present value of the residual value.
Mathematically, it can be represented as, Life Cycle Costing Formula = Initial Cost + PV of All Rec.
,
Process
We can break down the life cycle costing process into the following cost heads – initial investment, recurring cost, disposal cost, andResidual value is the estimated scrap value of an asset at the end of its lease or useful life, also known as the salvage value.
It represents the amount of value the owner will obtain or expect to get eventually wh.
,
What is life cycle costing?
Life cycle costing is also known as whole life costing.
Its primary purpose is to help management decide whether or not to go ahead with a project or acquire an asset.
Management usually analyses the cost of ownership and operating cost and then eventually chooses the asset with the minimum overall cost.
,
Why is whole life costing important?
In the case of customer service, whole life costing is used to minimize the amount of replacement, warranty, and field service.
It provides a precise estimate of the expected cost to be incurred over the asset’s life span.
It makes sure that the best decision is made based on an accurate and realistic estimate of costs.
