LIFE CYCLE COSTS

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What is life cycle costing?

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Life cycle costing, or whole-life costing,
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is the process of estimating how much

money you will spend on an asset over the
course of its useful life. Whole-life costing
covers an asset’s costs from the time you
purchase it to the time you get rid of
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Life cycle costing process
• Conducting a life cycle cost assessment helps you better predict how much your business
will pay when you acquire a new asset.
1. 1. Purchase
2. 2. Installation
3. 3. Operating
4. 4. Maintenance
5. 5. Financing (e.g., interest)
6. 6. Depreciation
7. 7. Disposal
8. Add up the expenses for each stage of the life cycle to find your total.
You might use past data to help you create a more accurate
cost prediction. To simplify the process, start with your
fixed costs.

 Fixed costs for businesses are the expenses that stay the

same from month to month. Then, estimate variable costs,
which are expenses that change.
 Life cycle costing process for intangible
assets
You can also use life cycle costing to determine how
much your intangible assets will cost. Intangible assets
are non-physical property, such as patents, your
business’s brand, and your reputation.

Although it is more difficult to add up the whole-life

cost of an intangible asset than a tangible asset
(physical property), it’s still possible. Consider the total
cost of acquiring and maintaining an intangible asset.
For example, patents cost thousands of dollars. You might
also need to hire a lawyer to help you obtain one. And, you
will need to pay fees to maintain your patent.

Or, consider your business’s brand. You might spend money

on all the things that go into creating your brand, such as
developing a logo, registering your name, and setting up a
small business website. Further, you will spend money on
marketing and maintaining your brand.
 Life cycle costing assessment example
Let’s say you want to buy a new copier for your business.

Purchase: The purchase price is 2,500.

Installation: You spend an additional 75 for setup and delivery.

Operating: You need to buy ink cartridges and paper for it, so you
estimate you will spend $1,000 on these supplies over the course of
its useful life. And, you expect the total electricity the copier will use
to be 300.

Maintenance: If the copier breaks, you estimate repairs will total 450.
Financing: You purchase the copier with your store credit card, which has an
interest rate of 3.5% per month. You pay off the printer the next month,
meaning you owe 87.50 in interest (2,500 X 3.5%).

Depreciation: You predict the copier will lose value by 150 each year.

Disposal: You estimate it will cost 100 to hire an independent contractor to

remove the copier from your business.

Although the purchase price of the copier is 2,500, the life cycle cost of the
copier could end up costing your business over 4,500.
 Purpose of the life cycle cost analysis

As mentioned, conducting a life cycle cost analysis helps

you estimate how much an asset will cost you over the
course of its life.

Take a look at some of the reasons why knowing an asset’s

total cost can guide your business decisions.
1. Choose between two or more assets
Using life cycle costing helps you make purchasing decisions. If you
only factor in the initial cost of an asset, you could end up spending
more in the long run. For example, buying a used asset might have a
lower price tag, but it could cost you more in repairs and utility bills
than a newer model.

Life cycle cost management depends on your ability to make a

smart investment. When you are deciding between two or more
assets, consider their overall costs, not just the price tag in front of
you.
2. Determine the asset’s benefits
How do you know if you should buy an asset? Generally, you
weigh the pros and cons of your purchase. But if you only
consider the initial, short-term cost, you won’t know if the
asset will benefit your business financially in the long run.

By using life cycle costing, you can more accurately predict if

the asset’s return on investment (ROI) is worth the expense.
If you only look at the asset’s current purchase cost and don’t
factor in future costs, you will overestimate the ROI.
3. Create accurate budgets
When you know how much an asset’s total price is, you can
create budgets that represent your business’s actual
expenses. That way, you won’t underestimate your
business’s costs.

A budget is made up of expenses, revenue, and profits. If you

underestimate an asset’s cost on your budget, you are
overestimating your profits. Failing to account for expenses
can result in overspending and negative cash flow.
THANK YOU.