Lately, we get a lot of questions about life cycle costing. Not only about what this is and how it works, but also which options CostPerforms’ solution offers to use life cycle costing for your company. In this blog, we’ll discuss these subjects. We start by giving you an understanding of the concept of life cycle costing and how it can maximize the financial performance of your business.
What is life cycle costing?
Life cycle costing is a well-established methodology that has been used for decades to evaluate the total cost of ownership of a product or service over its entire life cycle, from production to disposal. The total cost of ownership is a financial estimate intended to help you determine the direct and indirect costs of your product or service. However, performing a life cycle costing analysis can be complex and time-consuming, especially for businesses that are already stretched thin.
Use cases of life cycle costing
Life cycle costing is used by various stakeholders across industries. Organizations that are involved in product development, manufacturing, and distribution often utilize life cycle costing to evaluate the financial implications of their decisions. This methodology is best applied in scenarios where the total cost of ownership over the entire life cycle of a product or service is critical for decision-making.
For example, manufacturing companies can employ life cycle costing to compare different production methods, evaluate the costs associated with maintenance and repairs, and make informed decisions about product upgrades or replacements. Similarly, organizations involved in infrastructure development or construction projects can utilize life cycle costing to assess the long-term costs of building materials, maintenance, energy consumption, and disposal. Government agencies can also benefit from life cycle costing in public projects, such as road construction, where evaluating costs over the entire life cycle helps optimize resource allocation and budgeting. Ultimately, any scenario where understanding and managing the full costs of a product or service throughout its life cycle is essential can benefit from the application of life cycle costing methodologies.
Drawbacks of life cycle costing
Life cycle costing has drawbacks that you should consider. It involves complexity in estimating future costs accurately and relies on assumptions. Gathering reliable data for all stages can be time-consuming. Unforeseen changes during the life cycle can significantly impact estimated costs. It may not be suitable for rapidly evolving industries with short product life cycles or uncertain technology advancements. Despite these limitations, life cycle costing can provide valuable insights when used with care, realistic assumptions, and appropriate data.
How CostPerform can help you with life cycle costing
Next to all the options we already gave you in this blog of your life cycle costing analysis, CostPerform’s solution provides businesses with a range of powerful tools and features that can help them to better manage their finances and make informed decisions about their operations. CostPerform’s solution enables businesses to track costs at every stage of the production or distribution process, allocate costs accurately to different stages of the production or distribution process, and simulate the financial impact of different scenarios.
To give you a better understanding of this, we give you an example. Consider a company that produces a product with a life cycle of 7 years. By using CostPerform’s solution to track costs at each stage of the production process, the company can identify areas where costs are high and work to reduce them. By accurately allocating costs to different stages of the production process, businesses can better understand the financial impact of each stage and identify areas where cost reductions are possible.
Life cycle costing is an essential component of financial planning for any business. By considering all costs associated with a product or service over its entire life cycle, businesses can make informed decisions that will help them to achieve their financial goals. And with the help of CostPerform’s solution, businesses can more effectively perform life cycle costing analyses and achieve better financial performance over the long term. Do you want to know more about CostPerform, or our solutions? Download our brochure to learn more.