Importance Of Life Cycle Costing

Life cycle costing is a process of estimating and accumulating costs over a product’s entire life cycle in order to determine whether the profits earned during the manufacturing phase will cover the costs incurred during the pre- and post- manufacturing stages. Identifying the costs incurred during the different stages of a product’s life cycle provides an insight into understanding and managing the total costs incurred throughout its life cycle. In particular, life cycle costing helps the management to understand the cost consequences of developing and making a product and to identify areas in which cost reduction efforts are likely to be most effective.

Most accounting systems report on a period by period basis and product profits are not monitored over their life cycles. In contrast, product life cycle reporting involves tracing costs and revenues on a product by product basis over

Asset

An asset can be defined as any item that has a value to an organisation over time. Items such as buildings, physical plant and equipment and computer software are normally regarded as assets.

Life-cycle cost can also be defined as the sum of acquisition cost and ownership cost of an asset over its life cycle, beginning from the design stage, followed by manufacturing, usage, maintenance and ultimately, disposal.

Consideration of all these costs is important, even if they are funded from different sources within an organisation.

Life of an asset

The life-cycle of an asset is defined as the time interval between the recognition of a need or opportunity to create an asset, to the stage of its final disposal. This life cycle is characterised by a number of key stages:

• Initial definition of the concept;

• Development of the detailed requirements, specifications or