LIFE CYCLE COSTING

Life cycle costing is a method of economic analysis for all costs related to building, operating, and maintaining a project over a defined period of time. Assumed escalation rates are used to account for increases in utility costs over time. Future costs are expressed in present day dollars by applying a discount rate. All costs and savings can then be directly compared and fully-informed decisions can be made. It becomes especially useful when project alternatives that fulfil the same performance requirements, but differ with respect to initial costs and operating costs. These two have to be compared in order to select the one that maximizes net savings. On the other hand, LCC can also be defined as an alternative approach to cost management which accumulates and manages costs over a products life cycle (Adamany & Gonsalves,1994; Artto,1994; Susman,1989). The formula to calculate the LCC is as follows:

Accumulated Cost Products Life Cycle

This makes sense as most products costs are committed before the product is in the production phase. We can take an example of computer software which it incur cost most on R&D phase where roughly, 75% of the total cost. LCC also looks at product costs in the sales and post-sales stages. Besides that, it focuses on controlling costs throughout a products life. Life cycle costing usually found in manufacturing, product development, construction and software companies. It tracks and evaluates costing from the research and development phase of a products life, through design, manufacturing, marketing/distribution and finally customer services. LCC eliminate activities that are necessary and do add value. Moreover, even though it cannot use for financial reporting, but it is useful when the company is planning to introduce the new product. For example, mobile phone industry has a short life cycle and spent a lot of money in R & D phase. That is why, newly released mobile phones are sold at high price to recover the cost.

The Product Life Cycle (PLC) is used to map the lifespan of a product. There are generally four stages in the life of a product. These four stages are the Introduction stage, the Growth stage, the Maturity stage and the Decline stage. The following graph illustrates the four stages of the PLC:

The use of LCC must, whatever the phase of a programme, inform the process by which managers can bid for future expenditure, manage existing budgets and make the best decisions and options presented to them. Life cycle budget is an estimate of all expenses and revenues of a company incurs and derives from a product (Farlex Financial Dictionary. 2012). It can be developed to compare planned cost with predicted revenue over each year of the product life cycle. Moreover, life cycle budget linked to the annual budgeting and performance reporting process. That is why life cycle budgeting is not that easy because it is due to the change in customer taste, competitor, and inflation as well.

Life cycle costing can assist the organization to enjoy cost savings and maintain good relationship with customer if they know to apply the knowledge to the system and procedures together with the current issues arise during the process to make the best decisions overall. That is why there are two main purposes for using life cycle cost as a decision support tool for the program managers, analysts, project and team leaders etc. One of the main purposes is to use life cycle cost in economic appraisal and the other purpose is financial appraisal. Economic Appraisals are generally undertaken by organizations and Government bodies with an eye to the well being of that organization or country as a whole. As such they address opportunity costs (alternative use of assets or resources) but usually not simple transfer payments such as national taxes that move around the economy. Economic analysis may be simply summarized as addressing the costs and benefits of options to the national coffers and is not, necessarily, therefore concerned about precisely which part of the Departments budget is impacted. Any common costs not impacting the decision may be excluded to simplify, and hence reduce the costs of, the exercise. On the other hand, Financial Appraisals however include all cash flows and transfer payments and hence assess affordability. In financial appraisal, costs need to be split by budget holder, so they know their contribution, by phase to understand the significance over the life cycle and by major input cost category (manpower, stocks purchased, in year expenses etc). It also deals with day-to-day budget control and concerned with detailed costs. These two types of appraisal, although different, are not exclusive. They can make LCC a management and engineering tool with which to forecast and optimize the costs of a system. Whatever the type of use, the predictive use of LCC represents its principal interest. Strategic cost management emphasizes the importance of external focus and the need to recognize and exploit both internal and external linkages. Life cycle cost management is a related approach that builds a conceptual framework which facilitates managements ability to exploit internal and external linkages. There are few things to be in life cycle cost management that can affect the company profits or loss. Firstly would be the cash flow management or also known as cash budget. It involves estimation of cash receipts and cash disbursement in order to determine cash availability. Then comparison would be made on monthly or annually to identify where the cost variance went wrong. This cash budget could create income and reducing the liabilities that become expenses to the company.

Managing the hidden cost that cause by aging situation would be the second factor. It is challenged by cost reduction, economic instability, corporate downsizing and lower demand. Moreover, the maintenance cost for old things is more costly than the younger one where it cost the company a lot of money to be expense of. The third factor in life cycle cost management is reducing the downtime. This causes dramatic effect such generate lost time, rental cost, or the need for spare equipment to be add up. Besides that, lost revenue, loss of driver productivity and operational inefficiency are some areas that will further reduce the potential savings in monthly payments. Lastly would be leveraging new technology. Usually, an organization who does not take advantage of advances in technology will experience an opportunity cost from other aspects. This opportunity cost alone has the potential to reduce operating cost. If they are too concern, management must be able to act decisively and consistently on the information. Customers relationship with the business is a core part of the companys brand. This relationship determines whether customers will walk in your doors, buy a product, and return in the future. Like any relationship in our life, customer relationships and branding the customer experience will require effort on our part. There are five approaches of nurturing and building this key part of relationships. With the use of Customer Engagement Strategy is one of the approaches that can be use by the company to maintain their relationship with the customer. Customer Engagement Strategy is an action plan for engaging customers with your company or product. The medium of engagement can be on or offline. From this strategy, we will identify who is our target customer, their characteristics, the way we speak to them in order to get a response, and many more. Moreover, a robust customer engagement strategy delivers value to your customers and clients in a way that serves them in the way that they live. Utilizing cutting edge social media, we actively engage customers with our brand through real-time, instant feedback and interaction, giving us the tools to build customer loyalty and maintain long-term relationships as we, the customer and the company both grows. The second approach of maintaining the good relationship with the customer is Consumer Relationship Management System. Customer Relationship Management System (CRM) is corporate information software intended for improving customer services by means of storing the information about clients, contacts and the history of the relationships with them, establishing and improving business procedures based on the stored information and future evaluation of its effectiveness. Current CRS integrate with telephone and call

recording systems as well with corporate systems for input and reporting. Besides that, customers can provide input from the companys website directly into the CRS. Below is an overview of CRS works;

The third approach that can be used by the company to maintain good relationship with customers is through membership based system. For example, if you have membership in Popular Bookstore, you will enjoy membership price which they will give discount of ten percent of every items excluding the Nett price item. This will give you great savings as it gives you lower price than the original price. Moreover, through this membership system, it can increase the loyalty of the customer to your company as it gives better price than the other competitors. Other than that, we can also use social media to maintain good relationship with the customer. For example, through the facebook or twitter. Therefore, we can conclude that a products cost will vary with the stage in its life cycle. Life cycle costing and budgeting accumulates the revenues and costs associated with a product over its entire life cycle. The life cycle perspective helps management to minimise total product cost by recognising the trade-off between costs incurred prior to production, in design and development, during production and post-production. Moreover, it is important for the company to maintain the good relationship with the customer. This is because through the customer loyalty and their faith to our product or services will enhance the brand name and increase the sales as well as profit to the company.

http://www.green.harvard.edu/theresource/new-construction/life-cycle-costing http://www.quickmba.com/marketing/product/lifecycle/ http://www.nku.edu/~issues/internet_marketing/newwebpage1.html http://financial-dictionary.thefreedictionary.com/Life-Cycle+Budget http://www.oxagile.com/article/177-customer-relationship-management-system http://cygnet-crm.tumblr.com/post/41431990339/why-choose-microsoft-customerrelationship-management http://www.donlen.com/uploadedFiles/Home/Resource_Center/Thought_Leadership/Case_ Studies/Donlen-Lifecycle-Cost-Management.pdf