LIFE CYCLE COSTING

Life cycle costing, or whole-life costing, is the process of estimating how much money you will spend on an asset over the course of its useful life.

Whole-life costing covers an asset’s costs from the time you purchase it to the time you get rid of it. Buying an asset is a cost commitment that extends beyond its price tag to include operating costs and maintenance.

Life cycle costing process (tangible assets)

Conduct a life cycle cost assessment to better predict how much your business will pay when you acquire a new asset.

To calculate an asset’s life cycle cost, estimate the following expenses:

• Purchase
• Installation
• Operating

• Maintenance
• Financing (e.g., interest)
• Disposal

Add up the expenses for each stage of the life cycle to find your total. You should also consider depreciation, or the gradual reduction in the value of an asset, when planning for an asset.

Life cycle costing process (intangible assets)

You can also use life cycle costing to determine how much your intangible asset will cost. Intangible assets are non-physical property, such as patents, your business’s brand, and your reputation.

Although it is more difficult to add up the whole-life cost of an intangible asset than a tangible asset (physical property), it’s still possible. Consider the total cost of acquiring and maintaining an intangible asset.

For example, patents cost thousands of dollars. You might also need to hire a lawyer to help you obtain one. And, you will need to pay fees to maintain your patent.

Or, consider your business’s brand. You might spend money on all the things that go into creating your brand, such as developing a logo, registering your name, and setting up a small business website. And, you will spend money on marketing and maintaining your brand.