The paper "Integrating Environmental Factors into Life Cycle Costing" is an outstanding example of environmental studies coursework. Life cycle costing has gained prominence over the past few years. Life cycle costing encourages the expansion of accounting boundaries from dealing with only the present to adopting a more strategic look at the accounting needs of a firm (Schaltegger & Burritt, 2000). As will be noted in the paper, the benefits of life cycle costing are numerous. Among these benefits is the fact that life cycle costing can help to shed light on the environmental costs caused by a product over its entire life cycle.
This helps to make managerial decisions such as decisions on pricing more effective. This paper takes a look at traditional life cycle costing approaches and an evaluation is made as to the extent to which they have integrated environmental factors. The paper ends by stipulating how environmental issues and their costs can be incorporated into life cycle costing. Life cycle costing refers to the sum totalling of all the costs incurred during the lifetime of an item i. e. the total procurement and ownership costs (Dhillon, 1989).
The procurement cost refers to the acquisition or the investment costs whereas the ownership costs can be termed as costs involving maintenance as well as other costs connected to owning a product (Dhillon, 1989). Thus, according to Schaltegger and Burrit (2000), “ the basic idea behind life-cycle costing is to identify, track and account for costs relating to the whole life-cycle of a product” (p. 124). In today’ s market place, where organizations are constantly facing multiple challenges of competition, rapid technological advances and changing consumer tastes and preferences, it has become critical to cut back on costs incurred so as to maximise the benefits.
Organizations are relentlessly searching for new ways to reduce both their fixed and variable costs so as to increase their profit margins. Life cycle costing plays an important role in regulating both fixed and variable costs. It has wide applicability such as in “ comparing competing projects, long-range planning and budgeting, selecting among competing bidders, controlling an ongoing project, comparing logistics concepts, and deciding the replacement of aging equipment” (Dhillon, 1989, p.
30). Dhillon notes that the significance of conducting life cycle costing stems from the fact that at times the costs of operating/ owning a product may be more than the initial cost of the investment. Thus, life cycle costing helps to determine how costs will be spread out to allow the firm to break even and more importantly achieve profitability. Several models have been used by managers to carry out life cycle costing. These models “ contribute to cost reduction by identifying high-cost contributors” (Kumaran et al. , 2001, p. 262).
The same authors identify 8 models that are used by managers in the present day. However, the authors note that none of these models takes into account the environmental cost implications on the value of the product/ service. This shows that these models fall short of serving their purpose by capturing some costs while leaving others out. Some of these models include economic input-output LCA model, activity-based costing model, total cost assessment model, design to cost model etc. Attention is, however, shifting to the contribution of eco-costs to the total cost of the product through its lifecycle.
As such, a new approach to lifecycle costing is required.