Life Cycle Management

Life Cycle Cost Analysis

Benefits Of Life Cycle Cost Analysis

Life Cycle Cost Analysis

Life Cycle Cost Analysis (LCCA) is a method for assessing the total cost of a facility ownership. The concept was introduced in the U.S.A in 1960 and from there it spread over to the various business sectors. It is an analysis done to improve the cost effectiveness of a system.

The analysis is made on the basis of product development studies, project evaluation and management accounting. It calculates the overall cost of a system or product through its entire life span. In order to make a system cost effective, its various developmental stages are carefully studied, so that cost per developmental stage can be calculated accurately. The analysis of a system includes appraisal of cost for planning, research and development, production, operation, maintenance, cost of replacement and disposal cost.

Life Cycle Cost Analysis

The planning phase is the phase in which a plan for the development of the project is laid down. Thus, this phase involves a rough estimate of cost for development of the system. This may include the cost of planning the system or the cost of buying the equipment.

A panel of experts plan and research all the possible effective measures to develop the system. The life cycle cost assessment is determined by these experts. Once the project plan has been finalized, design commences.

The designing phase involves money spent right from the buying of the equipment to fitting them at the required places, so that they can work together as a single unit. Once the system is designed, it is implemented. Implementation costs may contain money spent on loading the system in its actual environment. Breakdown cost and failure cost are some of the hidden costs considered the under implementation phase.

A system is needed to be tested once it has been implemented. The testing procedures test the system on certain criteria. This is sometimes a fully automated process. The next phase is maintenance. Maintenance means keeping the system in an environment that ensures proper working of the system throughout its life cycle. Maintenance cost include the cost of repairing the system, cost of buying replaced parts for the system and the cost of buying the back-up programs. Cost analysis goes hand-in-hand with the life cycle stages of a product or system.

Life cycle cost analysis is important from a cost accounting point of view. It develops a table of reference that depicts when and how much cost will be incurred to build a system. If the total cost calculated is feasible, the product is constructed, otherwise it is discarded.

Life cycle cost estimation is beneficial because:

* All the costs associated with the development of the system become available at the beginning of the actual implementation of the project. This greatly assists the organization in deciding whether the project is to be developed or not from a costing perspective.

* It helps to analyze the business function interrelationships. By referencing the analysis report on expenditure, managers of a firm can predict accurate revenues at quite an early stage.

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