At least once in our lives, we have regretted buying something purely as a result of attractive offers offering cheaper prices, when the item consequently ended up being expensive, thanks to its constant maintenance costs. These small mishaps don't really affect us much, but what if the same happens when the money invested is extremely high? Or if that particular commodity negatively affects a person's everyday life?
What is Life Cycle Costing (LCC)?
Life cycle cost or in short, LCC, is an approach to cost estimation where the total cost of an asset or a product over its entire life is calculated.
- Initial buying costs
- Setting up costs
- Maintenance costs
- Operating costs
- Product's residual value at the end of its life cycle.
Life cycle costing provides a realistic rough estimate of the expenditures required to buy and maintain an asset throughout its lifetime. Because of this, LCC is also known as "cradle to grave" or "womb to tomb" costs.
Why calculation of Life Cycle Costing (LCC) for a product is important?
Generally, while looking to buy a product, we tend to go for the cheaper ones. But more often than not, these products end up having higher maintenance and operating costs which tend to become gradually expensive. When these costs keep adding up, it becomes higher than the other alternative products which were much more expensive in the first place, but have lower maintenance costs.
Although, as you can guess, calculating LCC for every single product especially in a large-scale project is time consuming, it is highly important that it is done. It can uncover all kinds of costs and ultimately make decision-making easy. Life cycle costing not only enables efficient planning but also helps to cut costs along the way. It is especially useful in long-term projects.
How to calculate Life Cycle Costing (LCC) for a product?
Let's take a hypothetical situation where there are two different types of products, A (expensive initial cost) and B (cheaper initial cost), which achieve the same task. Calculating the life cycle costing of the two can reveal which product can be more profitable in the long run.
- Identify the tentative initial buying costs, installation costs, operating costs, maintenance costs, depreciation and disposal values of the products
- Add the costs of the commodities in various stages
- Comparing the costs
- Analyze and carefully invest in them
As you can see, even though product A had higher initial cost (buying and setting up), it has relatively lower maintenance and operating costs, making it cheaper than product B in the long run.
Advantages of calculating LCC
The life cycle cost analysis has the following advantages:
Precise cost estimation
In the architecture industry, life cycle costing aids in managing and keeping track of precise budgets of the products.
- It helps in identifying investment and budget friendly options.
- LCC aids in giving a rough estimate to the client which isn't too expensive either since they will look for items that are cheap to maintain and operate.
- Identify all types of costs that we may not think of in the initial stages. People might be tempted with offers without realizing that over time, the other costs add pretty quickly.
- An estimation of individual costs and comparing them with similar commodities is achieved.
- It tells us whether the investment we put in will return, and if yes, when.
Comparison with other similar products
- Another major advantage of calculating life cycle costing is to make comparisons, so as to effectively decide which service or commodity can prove fruitful in the long term. As mentioned in the above example, not all products which are cheaper initially give profits in the long run.
- Comparing costs enables users to decide which is the more cost-effective option from the options available. This can maximize profits.
Planning the entire project
- Life cycle costing helps with the layout of the entire project.
- By choosing materials, services and commodities and estimating their costs, the project planning and budget allocation becomes much easier. For example, let us say a product’s initial costs are extremely high, it has a lifetime of 10 years, and the maintenance costs are low.
- It also helps clients understand why higher investments are sometimes needed. Without life cycle costing, budget planning is tougher, although possible.
Life cycle costing enables us to make better decisions with regards to our investments. Whether the product or service is big or small, while constructing something large scale, the costs add up to a bigger value. Hence, it is important to know when the money we invested comes back to our pockets, if at all.
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