Life-cycle costing

This is the method of establishing the cost of the plant and equipment over its recognized life
cycle. In maintenance situations the design and specification elements may be ignored, but
those that must be considered in establishing the life-cycle cost of plant and equipment will
include:
1. Purchase
2. Installation
3. Commissioning
4. Trials and tests
5. Operation
6. Maintenance
7. Replacement
For production plants and equipment, life-cycle costs are important in that the revenue from a
product must cover all aspects of expenditure. For plant and equipment such as boilers and
air-conditioning units, establishing life-cycle costs can play a major part in assessing when
these items should be replaced. For plant and equipment such as self-contained units (e.g.
pumps with sealed bearings, etc.), life-cycle costing may be used to determine their
replacement date.

The information on life-cycle costs gained with certain items of plant and equipment need
not be true for a similar item in another location, as specific details on operating hours, and
maintenance attendance can vary markedly. Also, it may be an auxiliary part (e.g. an electric
motor) of a major component. Therefore, it may have an entirely different set of parameters.
An important element that must be examined in detail when establishing life-cycle costs of a
specific item of plant and equipment is the demand placed on energy resources by them.

To establish costs with regards to a specific item of plant, sound feedback must be an
element of the company’s program and subsequent records must be maintained. To be
worthwhile these must include all costs: if not, the assumed life-cycle cost over a number of
years could be misleading.
 It follows that any maintenance program introduced for specific plant and equipment must
be designed so that all maintenance costs are recorded. This would then be taken into
consideration when the life-cycle cost of the item is assessed, as it should be added to the loss
of production if this has occurred due to any maintenance malfunction. Care must be taken
when presenting the life-cycle cost to ensure that all elements within the cost cycle have been
effective.

Life cycle costing must be considered when purchasing or taking over new plant or
equipment and include all aspects as listed above.
A major concern within maintenance departments and service contractors is the lack of
experienced maintenance technicians and craftsmen. This has been allowed to occur through
cutbacks in staffing levels accompanied by a reduction in training. A few companies provide
maintenance training, and it could be said that these are progressive in that they acknowledge
that, by providing training for their workforce, they will not find themselves in the situation of
searching for the limited skilled labor now available.

Planned maintenance can reduce the demand for highly experienced craftsmen in that, if the
instructions issued in work docket and advice/guidance notes are adequate, a less-skilled
person should be able to perform the work task correctly. It follows that adequate training
must be provided to ensure that, irrespective of the degree of the operative’s skills and
experience, the work task given will be carried out to the required standard.

There are a number of suitable training establishments available, but for the specific plant
and equipment within the organization, in-house training would provide a better.
MAINTENANCE COSTING
INTRODUCTION
The maintenance phase is an important element of the equipment life cycle during which
equipment must be maintained satisfactorily for effective performance. The cost of
maintaining equipment often varies from 2 to 20 times the acquisition cost. The cost of
maintenance is defined as costs that include lost opportunities in uptime, rate, yield, and
quality due to non-operating or unsatisfactorily operating equipment in addition to costs
involved with equipment-related degradation of the safety of people, property, and the

environment. However, often maintenance cost is simply described as the labor and
materials expense needed to maintain equipment/items in satisfactory operational state.
Fundamental costs associated with maintenance are classified more specifically into four
areas: direct costs, lost production costs, degradation costs, and standby costs.
1. Direct costs are associated with keeping the equipment operable and include costs of
periodic inspection and preventive maintenance, repair cost, overhaul cost, and
servicing cost.
2. Lost production costs are associated with loss of production due to primary equipment
breakdown and unavailability of standby equipment.
3. Degradation costs are associated with deterioration in the equipment life due to
unsatisfactory/ inferior maintenance.
4. Standby costs are associated with operating and maintaining standby equipment.
Standby equipment is used when primary facilities are either under maintenance or
inoperable.
REASONS FOR MAINTENANCE COSTING
Some of the many reasons for maintenance costing are as follows:
1. Determine maintenance cost drivers
2. Prepare budget
3. Provide input in the design of new equipment/item/system
4. Provide input in equipment life cycle cost studies
5. Control costs
6. Make decisions concerning equipment replacement
7. Compare maintenance cost effectiveness to industry averages
 8. Develop optimum preventive maintenance policies
9. Compare competing approaches to maintenance
10. Provide feedback to upper level management
11. Improve productivity

FACTORS INFLUENCING MAINTENANCE COSTS

1. Many factors influence maintenance costs, including
2. asset condition (i.e., age, type, and condition),
3. operator expertise and experience,
4. company policy,
5. type of service, skills of maintenance personnel,
6. operational environment,
7. equipment specification, and
8. regulatory controls.
COST DATA COLLECTION
In maintenance costing, various types of cost data are required. Management decides the type
of cost data the maintenance section or department should collect by keeping in mind its
future applications. This section briefly discusses the collection of the following types of
cost data:
1. Labor Costs: Generally, the timesheet is used to obtain data on labor costs.
Although the timesheet is a useful source of labor costs for maintenance
and accounting divisions, it is insufficient to obtain data on the total cost of
individual work orders. Under such circumstances, additional data are needed to
determine the costs by specific category of work, skill, or job. In such cases, it is
more appropriate to use a job ticket or a work order that can be designed to make
readily available all hours recorded for specific maintenance jobs.
2. Equipment costs: These costs are obtained from either the supplier’s invoice or the
purchase order.
3. Costs of spare parts and supplies: In maintenance work such costs are more
difficult to allocate than equipment costs. For example, it is not practically feasible
to charge individually for items such as nuts and bolts. Nonetheless, a work order is
an important source for obtaining this cost data.
4. Overhead Costs: Normally, these costs are obtained from the accounting department.
The maintenance department should examine their accuracy from time to time.
MAINTENANCE BUDGET TYPES, PREPARATION APPROACHES, AND STEPS
A maintenance budget serves as an important tool to control financial resources necessary
for running the maintenance department. Budget administration uses various types of
accounting procedures and computer-based systems to manage, control, and measure

departmental effectiveness. One of these two types of budgets is often used in maintenance
operations:
1. Operating budget
2. Project (or appropriation) budget
The operating budget is concerned with itemizing each category of operating expense
forecasted for every department in the organization. A purpose of this type of budget is to
control normal operating labor, material, and overhead costs forecasted for the coming fiscal
year. The budget includes items such as preventive maintenance, semi-annual plant
shutdown repairs and overhauls, minor modifications, and routine repair.
The project budget is concerned with special projects or programs such as computerized
maintenance management systems, major capital equipment purchases, and major
construction projects. Funds for projects such as these are not included in the operating
budget. The project budget is divided into particular types and amounts of materials, labor,
and overhead expenses needed to complete a defined project.

BUDGET PREPARATION APPROACHES

Two effective approaches that can be used to prepare budgets are discussed here:
historical approach and zero-based approach.
With a historical approach, the budget is based on historical perspective. Most budgets fall
into this category. Professionals involved in the preparation of this type of budget rely on
the experience of earlier years to determine cost estimates for the coming year. This
approach is efficient, rational, and requires a relatively small amount of paperwork. The
main drawback is that past errors tend to be perpetuated and ineffective operations are
funded proportionately to effective ones.
The zero-based approach is concerned with developing the budget from the ground up
without any historical basis. Each budget item is justified by current requirements or priority
versus the availability of funds. Budget items and subitems are grouped by priority into
work packages and, in turn, the work packages are classified into three categories:
expenditures required by law, expenditures not required by law, and new or first-time
budget items. Some of the advantages of the zero-based budget approach are as follows:
1. More thoughtful and thorough process
2. Better use of the funds available
3. More clear understanding of organizational objectives and goals at all
management levels
The zero-based budget approach has drawbacks in that it requires more time because it is
a more detailed process, and it requires more documentation in comparison to the historical
approach.

MAINTENANCE BUDGET PREPARATION STEPS

Professionals working in the area have developed a process for preparing a maintenance
budget. This process is as follows:
1. Collect information on trends over the past few years.
2. Seek input from the accounting department concerning cost trends and
improvements.
3. Seek input from the operations group concerning its plans for the coming year.
4. Obtain information on sales by product and department.
5. Determine maintenance labor-hours by skill and department, particularly for
equipment with high repair costs.
6. Estimate the amount of material required by department, in particular high-cost and
high-volume items.
7. Estimate overhead expenses.
8. Distribute expenses or costs by weeks and total them for each month.
9. Establish separate cumulative cost charts for every important variable, e.g.,
material, labor, and overhead.
10. Update individual and total costs periodically and plot them on appropriate charts.
The last two steps are basically concerned with the budget use.