THE TOOL OF LIFE CYCLE COST MANAGEMENT
There are many fiscal tools which help direction to director a undertaking. On the background of direction of the cost of undertaking over clip, it is of import to see the life rhythm cost direction method. This papers is to explicate about the life rhythm cost direction, the understanding about this fiscal tool and besides provides the direction to use this method in direction determination devising. In item, the procedures that apply to life rhythm cost direction and the usage of value technology in life rhythm cost direction with practicals illustrations are provided.
Undertaking, undertaking direction and undertaking cost direction
In the “ a usher to the undertaking direction organic structure of cognition ” , “ a undertaking is a impermanent enterprise undertaken to make a alone merchandise or service ” ( PMOBK Guide, 2000, p.4 ) . This definition established that every undertaking has a definite beginning and definite terminal. Furthermore, the merchandise or service which the undertaking conducts is different in some distinguishing manner with all others merchandises or services. Similarly, Gido and Clements stated that “ a undertaking is an enterprise to carry through a specific aim through a alone set of interconnected undertakings and the effectual use of resources. ”
Project direction is defined by the PMBOK as “ … the application of cognition, accomplishments, tools and techniques to project activities in order to run into stakeholder ‘s demands and outlooks from a undertaking. ” ( PMOBK Guide, 2000, p.6 ) In other words the undertaking director must make whatever is required to do the undertaking happen.
Undertaking cost direction
Undertaking cost direction is one of the nine countries in undertaking direction cognition, including four necessary procedures, resource planning, cost estimating, cost budgeting and cost control that are required in order to carry through the undertaking within the sanctioned budget ( PMOBK Guide, 2000, p.83 ) . The PMOBK notified that in the undertaking, particularly little 1s, resource planning, cost estimating and cost budgeting are seem to be a individual procedure but it is still of import to divide them because the tools and techniques for each are different ( PMOBK Guide, 2000, p.85 ) . Talking about the utility of cost direction, cost direction helps directors program and control outgos of undertakings by supplying better information on clip and where costs occur and what costs add to the value of a merchandise ( Babad & A ; Balachandran, 1993 ) .
Life rhythm cost direction
What is life rhythm cost and life rhythm cost direction?
Life rhythm cost ( LCC ) is identified as the entire cost associated with the deployment of merchandises during their economic life ; all the costs which occurred during the design, development, installing, operation, care and disposal of merchandises will be covered ( Barringer and Weber, 1996 ) . In other words, life rhythm cost ( LCC ) is a methodological analysis that can help cost direction attempts by ciphering the entire cost of having an plus in respect to the clip value of money, it includes the cost to non merely get the plus, but besides to utilize, keep, rehabilitate, and replace it ( Bruce & A ; William, 1980 ) . In fact, from pre-operations to the terminal of the option in the life rhythm cost, the costs for operation, care and disposal far exceed the installing costs.
In concerns, analysts must put to death LCC consequences in net present value ( NPV ) format with the consideration to depreciation, revenue enhancements and the clip value of money. With the instance of authorities, the inclusion of depreciation or revenue enhancements for LCC determinations is non required, but the clip value of money is an indispensable component. ( Barringer & A ; Associates, 2003 )
Overall, life-cycle costs ( LCC ) are all the costs about a undertaking throughout the undertaking ‘s life ; it includes all the costs from pre-operations to operations or to the terminal of the option. As the consequence, life rhythm cost direction is an economic theoretical account which is about to measure all the cost over the full life of merchandise or plan efficaciously. Otherwise, LCC is used as a determination support tool, life cost direction aims to take the most cost-efficient merchandise that optimizes the entire cost of its deployment, achieve the lowest long term cost of ownership ( Barringer and Weber, 1996 ) .
1.2 Life cost analysis
By life cost analysis, the creative activity, operation and disposal costs of a selected option are monitored throughout its life to enable accurate and seasonably decision-making as to how these costs can be minimised. Each proprietor is accountable for determinations required during the period of ownership merely when ownership of the plus alterations over clip.
Life Cost Analysis is used as the footing for monitoring and direction of costs over an plus ‘s life. It is basically a fiscal direction tool costs which are by and large non expressed as existent or discounted costs but as nominal costs ( ie. estimated costs that are to be paid when due ) to enable a comparing of the predicted cost and the existent cost. This enables better anticipation and accommodation of the Life Cycle Costing theoretical account ( LCC ) .
Reasons of utilizing life rhythm cost
By and large, the rating of costs is an indispensable portion of the plus direction procedure, and it is besides a general component of plus director ‘s tools such as Economic Appraisal, Financial Appraisal, Value Management, Risk Management and Demand Management. To accomplish better results from assets, the on-going operating and care costs must be considered as they consume more resources over the plus ‘s service life ; this is the Life Cycle Cost attack, a procedure which includes all the costs associated with an plus ( New South Wales Treasury, 2004 ) . Therefore, the usage of life rhythm cost is critical, and it is polar to the plus direction procedure as an input to the rating of options via Economic Appraisal, Financial Appraisal, Value Management, Risk Management and Demand Management. ( New south wales Treasury, 2004 ) .
Specifically, in respect to the intent of minimise entire costs of undertaking and see the struggles observed in most companies:
Undertaking Engineering wants to minimise capital costs as the lone standards,
Maintenance Engineering wants to minimise fix hours as the lone standards,
Production wants to maximise uptime hours as the lone standards,
Reliability Engineering wants to avoid failures as the lone standards,
Accounting wants to maximise project net present value as the lone standards.
Stockholders want to increase stockholder wealth as the lone standards.
Management demands to see these above factors and the streamer of minimise the cost of ownership, therefore, LCC is a utile method with the function of a direction determination tool by concentrating on facts, money, and clip. ( Barringer & A ; Associates, 2003 )
Purposes of utilizing life rhythm cost and general utilizing of life rhythm cost direction
As a determination support tool, the major intents of utilizing life rhythm cost are economic assessments and fiscal assessments ( A-zkil, n.d ) .
Economic assessments are normally concerned by administrations or authorities organic structures. In this instance, the intent of utilizing LCC is to take administration or authorities organic structures to be “ good being ” . Basically, all the associated and necessary costs over the merchandise ‘s life are listed and calculated. However, the costs, which significantly affect the administration ‘s budget, are concerned exactly ; any common costs non impacting the determination or merely reassign payments may be excluded to simplify, and therefore cut down the sum costs. ( A-zkil, n.d )
In contrast to economic assessments, fiscal assessments by and large include all the hard currency flows and transportation payments which occur in the full life of undertakings ( A-zkil, n.d )
Using life rhythm cost direction
In using life rhythm cost, LCC is used as a determination and optimisation standard to seek the best dialogue between clip, cost and public presentation. “ LCC must be used as a benchmark against which options can be measured for ‘value for money ‘ during the acquisition procedure, bearing in head that the greatest chances to cut down LCC normally occur during the early stages of the programme ” ( A-zkil, n.d ) .
2.1 LCC Models ‘ features
Before choosing a theoretical account of life rhythm costing, the intent of analysis and the needed information should be identified in respect to some regard such as the pertinence of costs, empirical relationship, changeless and variable constituents.
Life rhythm bing theoretical account is an accounting theoretical account which is available to gauge the entire costs of from the beginning to the terminal of a merchandise or plan by a figure of tools and factors in respect to the fact, money and clip. In some specific instance, some specific LCC theoretical accounts will be applied. Otherwise, in general, life rhythm bing theoretical accounts should be:
aˆ? represent the features of the plus being analysed including its intended usage environment, care construct, runing and care support scenarios and any restraints or restrictions
aˆ? be comprehensive plenty to include and foreground the factors relevant to the plus LCC
aˆ? be easy understood to let seasonably decision- devising, future updates and alteration
aˆ? be provided for the rating of specific LCC elements independently of other elements.
( New south wales Treasury, 2004 )
2.2 LCC dislocation into plus cost elements
To use the LCC theoretical account for a undertaking, it is necessary to breakdown the undertaking in to the cost elements. The degree of costs interrupting down depends on the demand of undertaking or LCC survey. However, in all the instance, the important costs which generate the activities of undertaking, the major resource cost classs such as labor, stuffs, operating expense, energy etc. , the clip in which the activities in the life rhythm is to be performed, are mandatory to be provided in the fixed or variable footings of costs.
( New south wales Treasury, 2004 )
2.3 Beginnings of cost informations
Sometimes much of information needed to deduce accurate clip and cost estimation is non available in the initial stage of the project-for illustration, design is non finalised ( Gray & A ; Larson, 2006 ) .
In the instance of using new engineering, the information is merely can be based on the estimated unit cost parametric quantities such as $ /construction or building unit/labour hours. During the life of the undertaking, the informations of cost will be more apparent and sufficient ( New south wales Treasury, 2004 ) .
2.4 Methods of CLL analyses
There are several methods to analyze the CLL of a undertaking. The peculiar method utilizing depends on the sum of informations which is about expected plus life and understanding about the engineering employed in the plus.
These undermentioned methods are by and large should be used:
aˆ? Analogous cost method
Analogous cost method involves cost appraisal based on past experience with a similar undertaking, merchandise or engineering ( A?apova , Kremlova & A ; Schneiderova , 2004 ) .
aˆ? Parametric cost method
Parametric cost method estimates the costs by sing major parametric quantities and discrepancies in the signifier of mathematical theoretical account. A parametric quantity reflects a change factor from one system of units to another. An illustration of an empirical factor which may be obtained as a statistical norm is the figure of care person-hours per failure of a given constituent. ( A?apova , Kremlova & A ; Schneiderova , 2004 ) .
aˆ? Engineering cost method
Engineering cost method involves direct appraisal of a peculiar cost component by analyzing the merchandise portion by portion. It uses standard budget points, or, for illustration, house technology and fabrication estimations to develop the cost of each constituent and its relationship to other elements which is known as Cost Element Relationships – Conditioned emotional response ) . ( A?apova , Kremlova & A ; Schneiderova , 2004 ) .
Life rhythm bing together with Value technology techniques are used to cut down cost and clip, better quality and public presentation, and optimize the decision-making. ( PMOBK Guide, 2000, p.83 )
The procedure of life rhythm cost direction
The figure above show five chief stairss of using the life rhythm cost direction from left to compensate over the undertaking ‘s life rhythm, from specifying the job to developing the estimation and analyzing the consequences
The procedure of using life rhythm cost direction can be more specific depends on the analyst in respect to a successful LCC application which when the rating can place possible jobs or impacts, influence determination devising, and support hereafter strategic planning and budgeting. ( Chapter 23: life-cycle cost estimation, n.d )
Harmonizing to Humphreys ( 2005 ) , value technology ( VE ) is a rational or scientific method to maximising value by trying to minimise direct costs and extinguish overdesigning while supplying serviceableness, safety, and favorable returns. In other manner, VE is a technique directed toward analysing the maps of an point or procedure to find “ best value, ” or the best relationship between worth and cost.
Dinsmore ( 1993 ) besides states that “ Value technology provides undertaking directors with a powerful tool for keeping quality criterions while extinguishing unneeded costs and giving visibleness for cost decrease attempts in the event of cost growing ” ( p.197 ) .
In brief, value technology is an organized attack for obtaining optimum value for each dollar spent, while keeping or bettering quality, safety, dependability, and maintainability ( Mansour & A ; Fam, 1994 ) . VE is a problem-solving technique based on analysis of the undertaking maps demanded by the proprietors for the intent of fulfilling the terminal users. It makes the best of multi-discipline squads to analyse a merchandise design, an technology construct, or building attack.
Value Engineering is non aimed at happening mistake with current designs or ways to “ degrade ” undertakings. Value Engineering is a procedure that looks at ways to:
Better the overall design ;
Simplify undertaking building ;
Improve undertaking care and
Lower a undertaking ‘s initial and /or life-cycle cost.
In this portion, the illustration is about the purchase of an car and it ‘ LCC and value technology are analyzed based on false information ( Chapter 23: Life rhythm cost estimating, n.d ) .
Measure 1: Specify the job or range
A purchaser wants to buy an car and has sufficient financess to buy an car up to $ 25,000.
Definitive characteristics are stat mis per gallon, estimated salvage value, costs of licences and reviews, insurance, and estimated care costs.
Measure 2: Premise or the demands of the cost theoretical account being used should be defined
All money is spent at the terminal of a twelvemonth for a given twelvemonth
Buyer will merchandise the auto in after four old ages
All theoretical accounts use the same class of gasolene at $ 1.25 per gallon
The user drives 22,000 stat mis per twelvemonth
Discount rate is 10 per centum
Monetary values escalate 4 per centum per twelvemonth
Insurance cost escalate 3 per centum per twelvemonth
Salvage value is in dollars at the clip of salvage
Measure 3: Collection informations
Car A: Purchase monetary value of the auto is $ 17,000, fuel is 24 stat mis per gallon recommended care is every 5,000 stat mis or 3 months, the mean care cost is estimated to be $ 250, and salvage value is $ 8,000.
Car Degree centigrade: Purchase monetary value of the auto is $ 13,000, fuel is 15 stat mis per gallon, recommended care is every 10,000 stat mis or 6 months, the mean care cost is estimated to be $ 350 and salve value is $ 5,000, initial cost of $ 800 is estimated to rectify some jobs.
From this LCC analysis, Car C is more economical for the purchaser than auto Angstrom. From this simplified LCC analysis its benefits and aim can be recognized.
Supporting computations for one-year costs:
For change overing the hereafter values to show worth, unvarying capital recovery ( UCR ) factor will be applied. Using 10 per centum rates, the UCR for the old ages 2,3, and 4 are as follows.
22,000 stat mis per twelvemonth x 4 old ages = 88,000 stat mis
Car A: 88,000 miles/5,000 stat mis per care = 117.6 ( usage 17 care visit since the last one will be at the terminal of ownership )
This equates to 4.25 care visits per twelvemonth.
Car Degree centigrade: 88,000 stat mis / 10,000 stat mis per care = 8.8 ( usage 8 care visits since the last one will be at the terminal of ownership ) .
The equates to 2 care visits per twelvemonth of ownership
Based on the above information analyzed, the LCC and value technology technique are shown their of import function in assisting to take the best options.
In decision, life rhythm cost direction and the usage of value technology in life rhythm cost direction is a utile proficient to assist the director in determination devising in finance in a long term concern. This paper provided the direction to use the LCC in direction and besides a practical illustration to assist the reader. There are some disadvantages when carry oning LCC such as the sufficient of required informations input, the cognition of analyst about the undertaking but the entire undertaking cost will be highly apparent by using this method, particularly with the value technology in order to do an effectual determination of a “ well-being ” company or administration.