Life-Cycle Costing

Everyone jokes about the 20/20 hindsight of cost management. In Life-Cycle Costing, Jan Emblemsvag proposes to do something about it.

Here's a new approach to life cycle costing that brings activity-based costing, risk, and uncertainty into the forefront. You'll focus on future costs and learn how you can perform any type of cost management activity better than before by introducing uncertainty into models and exploiting them to the max.

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Preface.

Acknowledgments.

1. Introduction.

What Does It Cost?

The Role of Life-Cycle Costing.

Why Activity-Based Life-Cycle Costing?

Notes.

2. Basics of Life-Cycle Costing.

What Is a Life Cycle?

What Is a Cost?

Four Ways of LCC.

Notes.

3. Uncertainty Analysis and Risk Management.

What are Risk and Uncertainty?

Uncertainty, Risk, and Utility.

Common Ways of Analyzing Risk and Uncertainty.

How Belief Sheds Light on Risk and Uncertainty.

Reduce Risk by Introducing Uncertainty: How Monte Carlo Methods Work.

Traditional Risk Management.

Notes.

4. Activity-Based Costing.

Motivating Example.

Activity-Based Costing.

ABC Example and Case Study.

From the Trenches.

Notes.

5. Activity-Based Life-Cycle Costing.

Step 1: Define the Scope of the Model and the Corresponding Cost Objects.

Step 2: Obtain and Clean Bill of Materials for All Cost Objects.

Step 3: Identify and Quantify the Resources.

Step 4: Create an Activity Hierarchy and Network.

Step 5: Identify and Quantify Resource Drivers, Activity Drivers, and Their Intensities.

Step 6: Identify the Relationships between Activity Drivers and Design Changes.

Step 7: Model the Uncertainty.

Step 8: Estimate the Bill of Activities.

Step 9: Estimate the Cost of Cost Objects and Their Performance Measures.

Step 10: Perform Monte Carlo Simulations and Relevant Analyses.

Further Explanation Regarding Some Steps.

Notes.

6. Case Study: Life-Cycle Costing and Tire Disposal.

What the Decision Is About.

Traditional LCC Implementation.

Activity-Based LCC Implementation.

Discussion.

Closure.

Epilogue.

Notes.

7. Activity-Based Life-Cycle Costing for Platform Supply Vessels.

Operating a Platform Supply Vessel.

Problem Statement and System Boundaries.

Information Sources.

Activity-Based LCC Model Implementation and Results.

Identifying the Major Operational Risks.

Closure.

Notes.

8. Activity-Based Life-Cycle Costing at WagonHo!

WagonHo!’s New Strategy and Business Idea.

Developing an Activity-Based LCC Model.

Results and How to Use Them.

Closure.

Notes.

9. From Hindsight to Foresight.

Activity-Based LCC Revisited.

Ideas for the Future.

Some Thoughts at the End.

Notes.

Appendix A Monte Carlo Simulation Example.

Problem Definition.

Hypotheses to Be Tested.

Results and Discussion.

Appendix B SFI Group System.

Glossary.

Acronyms.

Index.

JAN EMBLEMSVÅG is a management consultant with Det Norske Veritas Consulting, where he works on cost management, risk management, and business development projects. Formerly, he was a partner with Considium Consulting Group AS. He is coauthor, with Bert A. Bras, of Activity-Based Cost and Environmental Management: A Different Approach to the ISO 14000 Compliance. Everyone jokes about the 20/20 hindsight of cost management. In Life-Cycle Costing: Using Activity-Based Costing and Monte Carlo Methods to Manage Future Costs and Risks, Jan Emblemsvåg proposes to do something about it.

As product life-cycles become increasingly shorter and product development increasingly capital-intensive, the distance between the point of decision and that of measurable result shrinks, making the consequences of erroneous decisions abundantly clear and severe. Life-Cycle Costing (LCC), originally developed by the U.S. Department of Defense and traditionally associated with engineering, provides a means of accurately anticipating the total costs a product will incur throughout its life cycle. By incorporating Activity-Based Costing, risk management, and Monte Carlo methods, Emblemsvåg now presents a method for applying the benefits of LCC to a broader range of businesses. "Activity-Based LCC" not only proves flexible, effective, and efficient for most cost management considerations but also handles risk and uncertainty in a credible fashion.

Activity-Based LCC helps organizations apply knowledge about past performance and risks to make meaningful predictions about costs and risks associated with products, processes, and organization. Emblemsvåg begins by discussing the basics of LCC, defining key terms that are often used in different ways, such as "life cycle," "cost," and "expense." He then proceeds to explain how activity-based costing and traditional risk management can be used to apply LCC techniques to new commercial arenas. The heart of the book consists of three illuminating case studies. Chapter 6 concerns a tire disposal problem in the Norwegian county of Ullensaker and shows how traditional LCC and Activity-Based LCC were used to craft a solution. Chapter 7, on the operation of a platform supply vessel owned by Farstad Shipping ASA, demonstrates how LCC can assist both bidding and cost forecasting. Chapter 8, a more sophisticated study of WagonHo! Inc., addresses a variety of issues, such as:

• The dynamics of multiple products and cost objects
• Overhead cost considerations
• Cash flow and costing analysis
• How Monte Carlo considerations can help manage uncertainty and enhance the tracing of critical success factors

An appendix provides additional examples of the power of Monte Carlo methods to accurately account for risk. Jan Emblemsvåg’s forward-thinking Life-Cycle Costing provides companies a powerful means for predicting and managing future costs and risks.

Manage costs before they occur

"Traditional cost cutting has always had a backward focus and created lots of negative reactions–both rational and irrational. In his new book, Jan Emblemsvag introduces a new forward looking life-cycle approach to cost management. Employing foresight instead of hindsight puts the focus on processes, uncertainty and risks, and future value creation.

"The author’s strong side–besides having a good holistic concept–is the ability to express himself accurately and clearly on very complicated and sophisticated theory. Managers, consultants, and others with interest in cost management will be enlightened and inspired by the book–and no doubt find it of great help in applying the methods and processes that are presented.

"The idea of turning uncertainty into an asset for managers is quite unique. Making budgeting less data-oriented and more risk-oriented is another good idea. The next step now is to make operative approaches and apply the theory in practical situations!"
–John-Erik Stenberg
Considium Consulting Group AS

"This book skillfully combines the ideas of life-cycle costing and activity-based costing to come up with an approach to effectively manage costs in an uncertain environment."
–Dr. Arnold Schneider
Professor of Accounting
Georgia Institute of Technology

Life-Cycle Costing (LCC), a cost projection method typically associated with engineering, allows for the accurate prediction of the total costs a product will incur throughout its life-cycle. Meshing this technique with activity-based costing, risk management, and Monte Carlo analytical methods, Jan Emblemsvåg offers a broad range of businesses a new, more effective approach to cost management in Life-Cycle Costing.

By introducing uncertainty into its models, "Activity-Based LCC" offers managers the clarity of hindsight before costs are actually incurred. Among other features, Life-Cycle Costing includes:

• Three case studies that demonstrate how Activity-Based LCC affords superior cost management
• A step-by-step guide to LCC methodology
• Definitions of key terms
• A discussion of activity-based costing and risk management fundamentals
• An appendix with examples of Monte Carlo methods

Life-Cycle Costing provides controllers and cost managers an insider’s look at the next generation of cost management techniques.