Life Cycle Costing (LCC) is an important economic analysis used in the selection of alternatives that impact both pending and future costs. It compares initial investment options and identifies the least cost alternatives for a twenty year period.

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PROJECT REPORT
Managerial Accounting-Life Cycle Costing
Submitted to: Dr. Meena Bhatia
Submitted By:
Abhishek Sharma 15DM006
Pavan Kumar 15DM010
Ankit Sharma 15DM027
Ankur Aggrawal 15DM031
Arpit Panchal 15DM035
Anurag Dutt 15DM034

2. Acknowledgement
We take the opportunity to express our heartfelt gratitude towards Birla Institute of
Management Technology, Greater Noida.
Our deep sense of gratitude to Dr. Meena Bhatia, faculty of Managerial Accounting, for her
kind support timely guidance given to us for reaching for destination with perfection. We are
thankful to her for her suggestions and ideas to make this project work even better. The
enthusiasm shown by her in our project proved to be a great source of inspiration.
We are also thankful to our friends who helped us directly and indirectly for the successful
completion of this work.

3. Index
Acknowledgement............................................................................................I
Summary
Life Cycle Costing…………………………………………………………………………………………
Customer Profit Analysis……………………………………………………………………………..
Critical Evaluation…………………………………………………………………………………………
Conclusion……………………………………………………………………………………………………..
References………………………………………………………………………………………………….....
Appendix ………………………………………………………………………………………………………..

4. There are number of contemporary accounting information and strategy that the companies could
implement to improve its performance, so we have chosen two among those
 Life Cycle Costing
 Customer Profitability Analysis
Life Cycle Costing
Cost as we know is the basic driver of any industry’s profitability. To increase profitability we have to
increase revenue and reduce cost. But cost cannot be reduced by compromising on customer
satisfaction.
Life cycle costing analysis is used in selection of different choices that impact both pending and
future cost. It identifies least cost choices for a 20 year period and also compares initial investment
options. When seeking to make a profit on product, it is essential that total revenue arising from the
product exceeds the total cost, whether these cost are incurred during pre-manufacturing,
manufacturing or post-manufacturing. This is the concept of Life Cycle Costing.
Life cycle costing supports selection of all building systems that can impact energy use (thermal
envelope, Domestic hot water, passive solar feature). However this costing also builds feature and
involves cost related to productivity, maintenance & any other issue that impact cost. These
applications will help in increasing in overall efficiency.
There are four phases of cost involved in it
1. Design phase – like research, development & tooling.
2. Manufacturing phase - material labour overheads, inventory, maintenance & depreciation
3. Operation phase - Distribution, advertising and warranty claims.
4. End of life - environmental clean-up, disposal etc.
There are different guidelines and tools that effectively support life cycle costing analysis.
The National Institute of standard s and technology (NIST) has established the Building Life Cycle
Cost (BLCC) Computer programme to perform life cycle costing analysis.
This programme also includes current energy price index and discount factor references.
There are four major learning from Life cycle costing:-
1. Every cost should be considered when dealing with per unit cost and profitability.
2. If we consider all the cost that help in reducing cost of a unit and help in achieving target
costing of the company.
3. Different cost are interlinked with each other.
4. All cost are incurred and committed at different times.

5. Customer Profitability Analysis
Customer profitability analysis implies measuring of profit that a company generates by providing its
services to a customer. The central idea of following this approach is to create awareness about
profitable and non-profitable or less profitable customers. Customer profitability analysis is done at 3
levels namely individual level, segment level, aggregate business level. In segment level aggregation
we segregate customers from highly profitable to lowest profitable.
The factors that are used for profitability analysis are:
1) Gross margin
2) Sales volume
3) Number of transactions
4) Average sales per transaction
By carefully studying these factors we would be able to identify the customers who are providing us
less profit and draining our resources but also it would enable us to concentrate more on customers
that are source of high profit but were ignored till now.
Using the customer information, companies drop of unprofitable customers by raising the prices of
their services by huge amount. This information is also used attract various customers in future.
Companies can also develop advertising programmes and tailor made packages to attract customers
those would provide them maximum profitability.
STAGES FROM PROFITABILITY ANALYSIS TO PERFORMANCE IMPROVEMENT
1) Eliminating the customers:
Some customers may not prove to be costly in terms of direct cost but they may prove to be costly in
terms of Indirect Cost. It is clear that customers with low gross margins should be avoided but it is also
evident that customers with high margin require high efforts from operations. So a company has to
analyse profitability before shunning any customer.
2) Focus:
By avoiding the high maintenance customers a company can shift its focus to high profitable
customers and accordingly it can plan its strategy to sell more of its services to clients, who value their
relationship more. The focus of the company should be to get more business from the profitable
clients.
3) Increase Productivity:
By weeding its high maintenance low profit customers, the operations and finance department would
target improve productivity and services to those customers who have reasonable demands for
services.
The advantage of CPA is to improve profitability and a greater cash flow. This two are key elements
for performance improvement.
Barriers to Implementation
 Changes not acceptable by everybody in the company, so would be opposed.
 Sales person getting commission would try to protect them even they might be unprofitable to
the company

6.  Changing the sale incentive system from sales volume to customer profitability
 It is hard to convince management to drop out some loyal customers
Critical Evaluation
Life-cycle cost analysis (LCCA) is a tool to determine the most cost-effective option among
different competing alternatives to purchase, own, operate, maintain and, finally, dispose of an
object or process, when each is equally appropriate to be implemented on technical grounds.
Examples and Application Techniques:
LCC in Procurement Policy
Life cycle costing is a term describing a number of procurement analysis techniques that takes
into account the total or cumulative cost incurred in the ownership of the item. Such
considerations must include energy consumption, labour etc. which constitutes in a growing
apportion of ownership cost as energy prices continue to rise.
All factors affecting cost of owning and operating a piece of equipment should be considered in
the application of LCC system. These factors include estimated cost of preventive maintenance
and repairs, operation cost, length of useful life, and resale or salvage value. Products which are
used over a period of time and which have a resale value at the end of normal period of use. For
example cannot be accurately compared solely on the basis of initial cost. A machine with a low
initial cost may have such a short life, depreciate so rapidly, and cost so much to repair that it is
actually more expensive to own and operate than a machine with higher initial cost and a longer
useful life.
LCC analysis have a long history of use for economic analysis in the manufacturing and other
professional disciplines as a method for estimating the real life cost of owning the operating a
piece of equipment. LCC procedures add 2 major components to traditional cost i.e.
1) Operating and maintenance cost
All equipment cost money to operate as well as to purchase. Operational cost may be incurred in
the form of energy and material cost, maintenance, storage, labour and management. For a
piece of equipment or other purchased item with a short useful life, operating costs may be
relatively small in comparison to an initial purchase cost. For some items with longer anticipated
useful lives, operating costs over a period of years may be substantially more than the initial
purchase price. Analysis applying LCC procedures should emphasize a detailed analysis of
operating costs for longer life items, with less detail required for those items with short useful
lives.
2) Present Value of an Investment
A given amount of money today is generally more valuable that the same amount of money at
some future date. As an example , with an assumed rate of interest at 10% per year , $50 one

7. year from now has a “ Present Value” of only $45.45 ( $50 / 1.10 ). Accounting for the present
value of an investment is essential in the realistic comparison of the cost effectiveness for the
timing and types of possible alternate purchases, especially when an item considered for
purchase will have a multi-year useful life. The practice of accounting for the present value of
investment is called “Discounting” and is an integral part of the LCC process. Tables with pre-
calculated Discount rates (Or present value factor) are available for various interest rates and
years of the investment life.
LCC in government Energy saving Policy
There is a rapidly growing body literature which describes in detail alternate procedures for the
application LCC techniques to local government purchasing. While there are a variety of LCC
practices and procedures of varying sophistication, the general methods and components of an
LCC analysis can be summarised as follows:
Determine Specification for a Desired Purchase
Specification should state the specific functions desired in a piece of equipment, describing
standard features, optimal maintenance intervals, energy requirements and other performance
characteristics.
Determine Cost Factors for Analysis
Primary Cost Factors include acquisition cost, initial logistics cost, recurring costs and salvage
value or disposal costs. The acquisition cost is the price of the item. Initial logistics costs are the
identifiable, one-time costs incurred for the item, including installation and transportation.
Recurring costs are the operation and maintenance costs for the item during its useful life.
Salvage value is the estimated worth of the item at the end of its useful life.
Determine the Useful Life of the Item
Experience for purchases of similar materials or equipment and vendor warranties can be used
to estimate the useful life of a desired purchases. Useful lives may vary considerably among
competing types or brands of equipment.
Determine the Present Value of Each Alternative Investment
All cost factors should be expressed in terms of Present Value to account for the time value of
the investment. Only by stating all costs in terms of Present Value can a true comparison of the
cost-effectiveness of alternate investments be made.
Compare the Present Value of Each Alternative Investment
Once all cost factors have been adjusted to Present Value, the item with lowest net Present
Value will generally be the most cost-effective purchase.

8. LCC in Chemical Manufacturing
Let's consider the following data from a large chemical manufacturer:
The data suggests, and many of you have likely experienced, that in the first two years after
start-up, maintenance costs are higher, primarily due to the need to repair and replace certain
components that: A) did not meet the functional requirements of the operation, or B) experienced
early life failures due to poor installation and start-up problems.
In effect, an extra 3 percent of the asset's replacement value, or in this case its capital value, was
spent in the first two years correcting problems that should have been addressed during the
design and installation/start-up effort. Note that this does not include the effects of any production
losses, which likely have a substantially higher value (e.g., five times the maintenance costs),
depending on the gross profit margins for the product being made.
In any event, a better design and installation effort should minimize the risk related to these
problems (e.g., maintenance costs, production losses and the risk of injury; more equipment
failures result in a higher risk of injury).

9. Conclusions
Life cycle cost analysis procedures are substantially more complex than traditional first and lowest
cost procurement policies This drawback however is offset by LCC ability to furnish better total cost
comparisons of alternative purchases than can be provided by the simpler first cost techniques
The need to reduce energy cost can be a major factor in the decision to adopt LCC procurement
policies. In the past years energy cost for equipment operation were relatively unimportant factor in
procurement decisions with the almost certain probability of continuing energy prices increases,
however a purchasing officer should consider the effect of energy efficiency in procurement
decision.
LCC provides a tool to aid the reduction of energy costs and use in two primary ways. First, by
justifying the acquisition of more energy efficient equipment, a company can realise a direct
reduction in energy consumption and cost of its daily service and facility operations. Secondly,
Different parts of company also encouraged by them to design and market energy efficient
equipment
Finally LCC is a wise Purchasing technique even without consideration of its potential to reduce cost.
Applied even in abbreviated form it may still provide better rational for choice among alternative
purchases than can be furnished by first cost procurement techniques.

10. References
US General Services Administration Portal
Belding john A. Energy conservation and life cycle costing energy vol. 3 pp. 421-426 march
21 1978
Us department of health education and welfare , life cycle budgeting and costing as an aid
in decision making volume II Washington DC June 1976
www.accaglobal.com/lcca
www.strategiccfo.com/lcca

11. Appendix
Life cycle costing (LCCA) is a process of evaluating the economic performance of a building
over its entire life.
Table 1-1 LCC Formulas
Type of
Cost
Cost Examples Present Value
Relationships
Comments
Sunk Design Fees
Funds irrevocably
committed
Not Applicable Costs are not included
in the Analysis
First Investment Costs
Construction Costs
Purchase Price
For those investment
costs that begin at the
start of the analysis
period
Salvage
Value
Scrap value of
equipment
at the end of its service
life
Present value equals
the future value at the
end of the service life,
discounted by n
service years
Future
Investment
One time investments
occurring after the
start of the analysis
period
Non-Annual
maintenance
or repair
Major alterations to
initial investment work
Where FV is the time pro-
rated amount that
separates
investment value to the
end
of service life salvage
value.
Discount the future
value (Today’s Value
escalated at rate e to
year n) back to the
present.
Residual
Value
Equipment with a
service life extending
beyond the analysis
period
Residual value equals
the future value at the
end of the analysis
period, dis-
counted to the
present.

12. Table 1-1 LCC Formulas
Type of
Cost
Cost Examples Present Value
Relationships
Comments
Annually
Recurring
Fixed
Fixed payment service
contracts with inflation
adjustments
Preventative
maintenance
Annually Recurring
Cost, relating to
today’s value, which
increase in price at the
same rate as general
inflation. The UPWn
factors are within the
NIST BLCC program.
Annually
Recurring
Escalating
Service or maintenance
which involve
increasing
amounts of work
Frequent replacements
that escalate at a rate
different than inflation
The present value of
such costs are
calculated by
using a modified
version of the UPW
formula (UPW*)
which allows for cost
escalation.
Energy Fuel related costs, such
as fuel oil, natural gas
or electricity
Energy related UPW*
factors are found in
the NIST
BLCC program.
Escalation
Rates
Relating Budgetary
Escalation to Real
Growth
Escalation
Needed to convert
budgetary
escalation to real
growth escalation.
Definitions FV = future value
PV = present value
TV = today's value
d = real discount rate
e = real growth escalation rate (the differential escalation rate that exists after
removing the influence of general inflation)
n = number of years to occurrence or the analysis period, as appropriate
E = Budgetary Escalation
I = Inflation Rate
UPW = Uniform Present Worth factor for fixed recurring costs
UPW* = Modified Uniform Present Worth factor for escalating recurring costs