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A life cycle cost analysis calculates the cost of a system or product over its entire life span.
The analysis of a typical system could include costs for:
- planning,
- research and development,
- production,
- operation,
- maintenance,
- disposal or salvage.
Sometimes called a "cradle-to-grave analysis", or "Womb-to-Tomb"
A life cycle cost analysis is important for cost accounting purposes. In deciding to produce a product or service, a timetable of life cycle costs helps show what costs need to be allocated to a product so that an organization can recover its costs. If all costs can not be recovered, it would not be wise to produce the product or service.
It reinforces the importance of locked in costs, such as R&D.
It offers three important benefits
- All costs associated with a project/product become visible. Especially: Upstream; R&D, Downstream; customer service.
- Allows an analysis of business function interrelationships. Low R&D costs may lead to high customer service costs in the future.
- Differences in early stage expenditure are highlighted, enabling managers to develop accurate revenue predictions.
A typical quantitative analysis would invlove the use of a statement like that below. Where an easy comparison of costs can be seen by having the different products a compnay produces next to each other
See also
"Life cycle cost analysis"