1) Life Cycle Costing

Owners, users and managers need to make decisions on the acquisition and ongoing use of many different
assets including items of equipment and the facilities to house them. The initial capital outlay cost is
usually clearly defined and is often a key factor influencing the choice of asset given a number of
alternatives from which to select.
The initial capital outlay cost is, however, only a portion of the costs over an assets life cycle that needs
to be considered in making the right choice for asset investment. The process of identifying and
documenting all the costs involved over the life of an asset is known as Life Cycle Costing (LCC).
The total cost of ownership of an asset is often far greater than the initial capital outlay cost and can vary
significantly between different alternative solutions to a given operational need. Consideration of the costs
over the whole life of an asset provides a sound basis for decision-making. With this information, it is
possible to:
Assess future resource requirements (through projection of projected itemized line item costs for
relevant assets);
Assess comparative costs of potential acquisitions (investment evaluation or appraisal);
Decide between sources of supply (source selection);
Account for resources used now or in the past (reporting and auditing);
Improve system design (through improved understanding of input trends such as manpower and
utilities over the expected life cycle);
Optimize operational and maintenance support; through more detailed understanding of input
requirements over the expected life cycle)
Assess when assets reach the end of their economic life and if renewal is required (through
understanding of changes in input requirements such as manpower, chemicals, and utilities as the
asset ages).
The Life Cycle Costing process can be as simple as a table of expected annual costs or it can be a
complex (computerized) model that allows for the creation of scenarios based on assumptions about
future cost drivers. The scope and complexity of the life cycle cost analysis should generally reflect the
complexity of the assets under investigation, the ability to predict future costs and the significance of the
future costs to the decision being made by the organization.
A life cycle cost analysis involves the analysis of the costs of a system or a component over its entire life
span. Typical costs for a system may include:

Acquisition costs (or design and development costs).

Operating costs:

Cost of failures

Cost of repairs

Cost for spares

Downtime costs

Loss of production

Maintenance costs:

Cost of corrective maintenance

Cost of preventive maintenance

Cost for predictive maintenance

Disposal costs.
A complete life cycle cost projection (LCCP) analysis may also include other costs, as well as other
accounting/financial elements (such as, interest rates, depreciation, present value of money/discount rates,
etc.).
For the purpose of this Tool, it is sufficient to say that if one has all the required cost values (inputs), then
a complete LCCP analysis can be performed readily in a spreadsheet, since it really involves summations

of costs for several options and computations involving discount rates. With respect to the cost inputs for
such an analysis, the costs involved are either deterministic (such as acquisition costs, disposal costs, etc.)
or probabilistic (such as cost of failures, repairs, spares, downtime, etc.). Most of the probabilistic costs
are directly related to the reliability and maintainability characteristics of the system.

2) What is a learning curve?

A common learning curve shows that the cumulative average time to complete a manual task which
involves learning will decrease 20% whenever volume doubles. This is referred to as an 80% learning
curve.
Learning curves enable managers to project the manufacturing cost per unit for any cumulative production
quantity. Firms that choose to emphasize low price as a competitive strategy rely on high volumes to
maintain profit margins. These firms strive to move down the learning curve (lower labor hours per unit
or lower costs per unit) by increasing volume. This tactic makes entry into a market by competitors
difficult. For example, in the electronics component industry, the cost of developing an integrated circuit
is so large that the first units produced must be priced high. As cumulative production increases, costs
(and prices) fall. The first companies in the market have a big advantage because newcomers must start
selling at lower prices and suffer large initial losses.
Improvements in technology can mean time and cost reductions beyond those in the learning curve. For
example, software may become available to assist in the design and coding, computer processing speeds
might
increase,
there
may
be
lower
costs
of
processing
and
storage,
etc.
The learning curve is important for setting standards, estimating costs, and establishing selling prices.

Learning Curve, Showing the Learning Period and

the Time When Standards Are Calculated

Problem:
The manager of a custom manufacturer has just received a production schedule for an order for 30 large
turbines. Over the next 5 months, the company is to produce 2, 3, 5, 8, and 12 turbines, respectively. The
first unit took 30,000 direct labor hours, and experience on past projects indicates that a 90 percent
learning curve is appropriate; therefore, the second unit will require only 27,000 hours. Each employee

works an average of 150 hours per month. Estimate the total number of full-time employees needed each
month for the next 5 months.