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Second level
Third level
Management
Fourth level
Fifth level
Studies 2
2011-2012 Presentation

Delivered by: Andrew Spowage, Christina Chin, Sucy Thomas

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Created by: John Dominny 1
Contact Details Andrew Spowage

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The University of Nottinghams Malaysia Campus
Second level
Third level
Tel : +603 89248163
Fourth level
Fifth level
Room : BB77

Email : Andrew.Spowage@nottingham.edu.my

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Overview of the course

Lec Week Date Title Lecturer

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1 21 9th Feb Course Synopsis and Life Cycle Andrew
Costs
2
Second
22
level
16th Feb Project Evaluation (part 1) Christina
3
23 Third
23rd level
Feb Project Evaluation (part 2) Christina
4 24 st Mar
1Fourth Project Planning the PERT
level Christina
method
Fifth level
5 25 8th Mar Risk Management Christina
6 26 15th Mar Project Monitoring Earned Andrew
Value Analysis
7 27 22th Mar Marketing Andrew
8 28 29th Mar Quality Management the Six Andrew
Sigma method
9 29 5th April Starting the Business Andrew
10 30 12th April Introduction to English Law Sucy
11 31 19th April Revision Andrew 3
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 Click to edit Master text styles
Second level
ThirdManagement
level Studies 2
Fourth level
Lecture 1
Fifth level

Life Cycle Costing

Associate Prof. Andrew Spowage @ UNMC
4
Prof. J Dominy @ UNUK 4
Learning Outcomes

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To understand
to edit Master
the basic
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use and value of
LCC
Second level
Third level
Fourth level
To appreciate the
Fifth level different phases of LCC

To understand the importance and use of

LCC models

To know how to apply LCC 5

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Overview

Introduction
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to LCC text styles
Second
LCC phaseslevel
Third level
LCC models
Fourth level
LCC implementation
Fifth level

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Introduction Why LCC

At the start of any project it is important to understand the

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costs involved
Second
Traditional levelsimply look at start-up costs, cash flow
methods
and profit (or loss)
Third level
With morecomplicated
Fourth level projects, it is necessary to
understand thelikely casts and cash flow throughout the life
Fifth level
of the project
This allows the financial managers to;
Understand when the project will break-even
What are the likely costs and returns during the life of
the project
Estimate the likely life of the project.
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Introduction Historically

Life Cycle
Click Costing
to edit (LCC)
Master is not new:
text styles
Second level
US Third
government
level records dating back to 1933
Fourth level
The Building Research Institute Conference
Fifth level
Methods of Building Cost Analysis in 1961
The Logistics Management Institute published a
report in 1965 for DoD US and subsequently the
publication of guidelines for LCC acquisition

So who can tell me what it is all about?

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Introduction Widely endorsed

The Office
Click of Government
to edit Master textCommerce
styles (OGC), UK
National
Second Institute
level of Governmental Purchasing
(NIGP), USA
Third level
National Association
Fourth level of State Procurement
Officials (NASPO),
Fifth level USA
American Bar Association (ABA), USA
National Association of Fleet Administrators
(NAFA), USA
Caterpillar Inc.
International Electrotechnical Commission
published a standard (IEC 60300) 9
Etc 9
Introduction Definition

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Second level
A systematic analytical process of
Third level alternative courses of action
evaluating
Fourth level
with the objective of choosing the best
Fifth level
way to employ scarce resources

By B. Blanchard

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Introduction Nomenclature

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Through
to Life
editCosting
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Life Cycle Costing
Second level All contain the
Whole Lifelevel
Third Costing same basic
CradleTo Grave
Fourth level philosophies
Womb To TombFifth level

Life cycle cost analysis

Life cycle costing should not be confused with:

life cycle analysis which is a part of the ISO 14000
series concerned with environmental issues
product life cycle analysis which is a time dependent 11
marketing construct 11
Introduction What is LCC?

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A technique to establish
to edit Master the total cost of
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ownership
Second level
Third level
Fourth level
It is
a structured approach that addresses
Fifth level
all the cost elements

It can be used to produce a spend profile

of the product or service over its
anticipated life-span 12
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Introduction What is LCC?

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Second level
Acquisition Cost

Third level
Training Cost Special Test
Equipment Repair
Fourth level
Cost Cost
Fifth level Facilities
Cost
Supply Support Transportation and
Inventory and Distribution Handling Cost
Cost

Disposal Technical
Cost Data Post

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WHAT IS THE REAL COST OF OUR EQUIPMENT ? 13
Introduction
Fundamental Principle

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Second level
Third level
Fourth level
Fifth level

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Introduction
Fundamental Principle

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Second level
Third level
Fourth level
Fifth level

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Introduction
Fundamental Principle

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Is anything missing?
Second level
Third level
Fourth level
Fifth level

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Introduction
Why is it important?

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The visible costs
to edit of anytext
Master purchase
stylesrepresents
only a smalllevel
Second proportion of the total cost of
ownership
Third level
Fourth level
There are 4Fifth level
major benefits of LCC analysis:
Evaluation of competing options in purchasing;
Improved awareness of total costs;
More accurate forecasting of cost profiles; and
Performance trade-off against cost

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Introduction
Why is it important?

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With LCC
to all
editmajor costs are
Master established
text styles in advance
All of the owning and operating expenses throughout a
Secondworking
machines level life are considered
LCC can save
Third guesswork in budgeting
level
LCC can reducelevel
Fourth worries about the costs of machine
repairs, downtime, and lack of availability
Fifth level
LCC can also protect you against a dealer who wont or
cant stand behind the machines they sell
Procurement based on LCC can reduce total costs
It is useful in making decisions associated with
equipment replacement, budgeting and planning
Provide downstream resource visibility
Support downstream strategic budgeting
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Introduction
Why is it important?

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Wouldto edit
you Master
considertext
thestyles
purchase of an
Second level
automobile solely based on its list price?
Third level
Fourth level
Or would Fifth
youlevelalso consider:
Reliability
Depreciation
Maintenance costs
Fuel cost
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Introduction
Disadvantages

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The accuracy of LCC analysis
to edit Master diminishes as it
text styles
predicts further into the future
Second level
LCC Third
is time consuming
level
Fourth level
LCC is an expensive
Fifth level concept, not appropriate
for all applications
The assumption is that the product has a finite
life-cycle
The accuracy of data is often doubtful
It has a high sensitivity to changing requirements
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Overview

Introduction
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to LCC text styles
Second
LCC phaseslevel
Third level
LCC models
Fourth level
LCC implementation
Fifth level

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LCC Phases

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Second level
Third level
Fourth level
Fifth level

LCC V2 22
Andrew Spowage 2007 22
LCC Phases Elements

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Acquisition
Second level Operation Disposal
Third level
Manufacturing
Fourth level
Procurement Reconfiguring
Fifth level
Design Maintenance Disposal

Delivery Training Recycling

Installation Operation Dismantling

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LCC Phases Importance

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LCC istobased on the premise
edit Master that:
text styles
Second
to arrive at a meaningful purchasing decision full
level
account must be taken of each available option
Third level
Fourth level
All significant
Fifth expenditure
levelof resources likely to
arise must be addressed

Explicit consideration must be given to all

relevant costs for each of the options from initial
acquisition through to disposal
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Overview

Introduction
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to LCC text styles
Second
LCC phaseslevel
Third level
LCC models
Fourth level
LCC implementation
Fifth level

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LCC Models

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Second
No single level
generic model
Third level
Fourth level
Different model
Fifth level for
different system due to
uniqueness of cost data

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LCC Models Aims

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Typical
to aims of Life text
edit Master Cycle Cost Modeling?
styles
Second level
To identify
Third level the total cost of alternative
means oflevel
Fourth solving / making purchase
Fifth level
To achieve our cost, schedule and
performance objectives
To estimate the cost impact of various
designs and support options

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LCC Models Requirements

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Any LCC
to edit
Model
Master
needs
textto:
styles
Second level
To identify and define precisely each cost
element during the entire life cycle
Third level
Fourth each
To assign level defined cost in a LCC phase
Fifth level
Ensure that each partner speaks the same
cost language i.e. A standard nomenclature
Ensure each partner uses same inputs and
understands same results

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LCC Models

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To compute
to the life
edit cycle costs
Master text of a system, the following
styles
straightforward equation is frequently used
Second level
LCC
Third level+ Ko + Kd
= Kaq
Fourth level
Where, Fifth level

LCC - Life Cycle Cost

Kaq - Cost of Acquisition Phase
Ko - The cost of operation Phase
Kd - The cost of disposal
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Overview

Introduction
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to LCC text styles
Second
LCC phaseslevel
Third level
LCC models
Fourth level
LCC implementation
Fifth level

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Implementation

Consider
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to edit following
texttostyles
avoid failure: -
Second
Guidelineslevel
Common Errors
Third level
Fourth level
Fifth level

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Implementation Guidelines

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A LCCto
unit should
edit be attached
Master to the finance or
text styles
logistics
Second departments
level
The LCC
Third must
level start as early as possible
Performance requirements should be
Fourth level
documented Fifth level

Both the management and customer should be

capable of using LCC
Necessary time should be allowed to the life
cycle costing group
Necessary cost data should be available to the
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LCC group 32
Implementation Common errors

Loss or
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edit Master of text
datastyles
Lack of systematic
Second level structure
Misinterpretation
Third level of data
Fourth level
Wrong or Fifth
misused
level
techniques
A concentration on insignificant facts
Failure to access uncertainty
Failure to check work
Estimating the wrong items
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Implementation Guidelines

Step 1: Make your model for the equipment

Step
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2: Negotiate text styles
the acquisition price
Step Second levelany trade-in amount
3: Subtract
Step 4:Third
Addlevel
the scheduled maintenance costs over
the defined
Fourth level period
Step 5: Add the
Fifth repair
level costs over the life of the
equipment
Step 6: Add the extended warranty to cover all
defective parts and workmanship
Step 7: Add a provision for availability that will
guarantee the in-service time of the machine
Step 8: Define the end of life option
Step 9: Finally, your total life cycle cost for the
equipment is established 34
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Implementation Barriers

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Institutional
to editinertia
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Symbolic
Secondroles
levelof sophisticated accounting
systems helps to maintain a rational faade
Third level
In many departments,
Fourth level the responsibility for
acquisition costlevel
Fifth and subsequent support funding
are held by different areas
Consequently, there is little or no incentive to
apply the principles of LCC to purchasing
policy
Potentially high cost of collecting appropriate
data
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Implementation Barriers

Concept of unpredictability :
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It is a common belief that there are so many
unforeseeable
Second levelor Unquantifiable parameters it is
impossible to conduct adequate LCC.
Third level
Fourth level
Fifth levelProject Environment
Example of
project Technological Industrial disruption
uncertainties Work scope Weather
Configuration control Politics
Reliability Administration
Productivity Market forces
Contracting philosophy Demand 36
In Conclusion

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True LCC
to can
editonly be determined
Master after a system or
text styles
equipment has been withdrawn from service
Second
LCC levelin many applications in an
can be used
organization:
Third level
Purchasing
Fourth level
Developing new level
Fifth products
Optimal time for withdrawal
When making trade-offs and evaluate various alternatives
LCC should be a dynamic tool used by engineers to
assess the costs of each phase
The sooner a LCC modeling tool is used, the faster it will
have an impact on the logistic lifecycle

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Home Work

Click
http://www.treasury.nsw.gov.au/__data/as
to edit Master text styles
sets/pdf_file/0005/5099/life_cycle_costings
Second level
.pdf Third level
Fourth level
Fifth level

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Lecture 1 - LCC V9: Andrew Spowage for Management Studies 2 2012 38
A gift

Click
www.bbc.co.uk/science/humanbody/sleep/
to edit Master text styles
sheep/reaction_version5.swf
Second level
Third level
Fourth level
Fifth level

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Lecture 1 - LCC V8: Andrew Spowage for Management Studies B 2011 39
References

1. Al Bhimani., Int. j. production Economics, 36, 29-37, 1994.

2.
3.
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C Berliner, J Brimson., Harvard business school press, 1988.
M Morrow, Activity based management, wood-len-Faulkner, uk
4. J G Miller, T E Vollmann, Harvard Business Review 60-79. 1985.
5.
Second level
K Williams, J Williams, C Haslam. Conference proc. Interdisciplinary perspective on
accounting vol 3 July 1988.
6.
Third level
R Cooper, J. Cost Mgmt. Manufacture. Ind. 39-45 1987.
7. R copper, R SFourth
Kaplan,level
Accounting and management, Harvard business school press,
1988.
8. H T Johnson, J. Fifth
cost. level
Mgmt. 15-21, 1990.
9. C J McNair, W Musconi, T Norris, meeting the technology challenge, NAA, 1988.
10. R S Kaplan measuring manufacturing performance. The Acc Rev. 686-705, 1983.
11. R S Kaplan, Yesterdays accounting undermines production, Harvard business Review,
95-101. 1984.
12. R S Kaplan , Introduction to accounting for the 90s, The challenge of technology change
proceedings NAA, 7-10, 1986.
13. R S Kaplan, D P Norton. The balanced scorecard: Measures that drive performance,
Harvard Business Review 72-79, 1992.
14. www.ogc.gov.uk/implementing_plans_introduction_life_cycle_costing_.asp

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Lecture 1 - LCC V8: Andrew Spowage for Management Studies 2 2012 40