L
C C - LIFE CYCLE COSTING
(Important
5 marks/10 marks question in Management Accounting Section of LDCE.)
Ø Also called
as "Cradle to Grave Costing" or "
Womb to Tomb Costing" or
"Whole Life Cost"
Ø If considers
definition and concept of LCC, the substitute names as referred above are
perfect ones.
Ø Definition:
Sum of all Recurring ( Revenue) and Non-recurring (Capital) costs over the Full
Life period of a goods, services/system etc. That means a method of calculating
the Total cost of a physical asset throughout its life i.e., costs incurred
from its purchase to its disposal, incl: design, installation, operating and
maintenance costs (through out life period of asset). But Depreciation
will not be taken into the account of such Total cost.
Ø LCC includes: A)
Purchase/Acquisition price B) Installation and other associated
costs C) Maintenance/operating costs D) Salvage value (deduct
one). All these costs usually discounted and totaled to a PRESENT
DAY VALUE known as NPV - NET PRESENT VALUE.
Ø Beginning phase of
LCC: In USA for procurement of Defense equipment
in the year 1960
Ø Simple illustration:
The organisation wants to buy an Machinery. It called for tenders and the
offers were as follows.
Machine A - Initial Cost -Rs.1,00,000, Maintenance costs -Rs.10,000 per year. Life -10 Years
Machine
B - Initial Cost - Rs.75,000, Maintenance costs - Rs.15,000 per
year. Life - 10 years
Note: Both
Machine A & B are as per organisation's specifications
and requirements.
Decision
under Conventional system: Machine B
will be finalised because, the initial cost is 75,000 is less than Machine A's
initial cost Rs.1,00,000.
Decision
under LCC: Machine A will be
finalised. Because the LCC of Machine A is less than Machine B as
shown below.
A. The
Life Cycle Costs of Machine A : Rs.1,00,000 + Rs.1,00,000 ( Maintenance
costs -10 years @ Rs.10,000 ) = 2,00,000
B. The
Life Cycle Costs of Machine B: Rs. 75,000 + Rs.1,50,000
( Maintenance costs - 10 years @ Rs.15,000) = Rs. 2,25,000
Note:
Here Time value of money or NPV is not considered for the sake of brevity.
Otherwise these too will be taken into the account before arriving the
decission.
Ø Advantages:
1.
Costs incurred after an asset has been constructed or acquired, such as
maintenance, operation, disposal become an important consideration in decision
making.
2.
Previously, the focus has been on the up-front capital costs of creation or
acquisition and failed to take account of the maintenance and operating costs.
LCC
& Indian Railways
ü Indian
Railways employs LCC while procuring the Box N Wagons (life 35 years) and
Energy intensive products.
ü Ministry of
Railways have constituted a Committee of Executive Directors to identify
TWO ITEMS each of Engineering, Electrical, Mechanical and S & T Depts for
undertaking their procurement on LCC basis and to examine various issues
involved in adopting LCC.
ü The Committee
identified EIGHT ITEMS subject to
1. The functional
specifications & minimum technical parameters for any item procured through
LCC basis should be specified by RDSO.
2. INTER-DEPENDANT
ITEMS (Example ERC & Rail pad) should preferable have similar life cycle.
3. Railways may like
to include more safety related items for procurement on LCC basis, which
have maximum anticipated life of 8 years to start with.
4. 20 % of the total
requirement may be procured on trial basis by each Zonal Railway on the basis
of LCC.
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