Life cycle cost analysis

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For other uses, see life cycle analysis.

For other uses, see product life cycle.

Life cycle cost analysis became popular in the 1960s when the concept was taken up by U.S. government agencies as an instrument to improve the cost effectiveness of equipment procurement. From that point, the concept has spread to the business sector, and is used there in new product development studies, project evaluations and management accounting. As there is high interest in life cycle cost analysis in maintenance, the International Electrotechnical Commission published a standard (IEC 60300) in 1996, which lies in the field of dependability management and gives recommendations how to carry out life cycle costing. This standard was renewed in July 2004.

1 Realization of a life cycle cost analysis
2 Disambiguation
3 See also
4 References

[edit] Realization of a life cycle cost analysis

A life cycle cost analysis calculates the cost of a system or product over its entire life span. This also involves the process of Product Life Cycle Management so that the life cycle profits are maximised.

The analysis of a typical system could include costs for:

This cost analysis depends on values calculated from other reliability analyses like failure rate, cost of spares, repair times, and component costs.

Sometimes called a "cradle-to-grave analysis", or "Womb-to-Tomb"

A life cycle cost analysis is important for cost accounting purposes. In deciding to produce or purchase a product or service, a timetable of life cycle costs helps show what costs need to be allocated to a product so that an organization can recover its costs. If all costs can not be recovered, it would not be wise to produce the product or service.

It reinforces the importance of locked-in costs, such as R&D.

It offers three important benefits:
- All costs associated with a project/product become visible, especially: upstream, R&D; downstream, customer service.
- It allows an analysis of business function interrelationships. Low R&D costs may lead to high customer service costs in the future.
- Differences in early stage expenditure are highlighted, enabling managers to develop accurate revenue predictions.

A typical quantitative analysis would involve the use of a statement where an easy comparison of costs can be seen by having the different products a company produces next to each other.

[edit] Disambiguation

Life cycle cost analysis or life cycle costing should not be confused with

life cycle analysis which is a part of the ISO 14000 series concerned with environmental issues
product life cycle analysis which is a time dependent marketing construct