Life Cycle Cost Modeling of Pumps Using an Activity Based Costing Methodology

Abstract

Global competition is forcing manufacturing firms, designers, and customers to adopt life cycle costing methodology. The product life cycle costing (LCC) approach can help track and analyze the cost implications associated with each phase of product life cycle. LCC practices with traditional costing methods may provide results that have a severe deviation from the real product LCC as they focus on the cost of materials, labor, and a low portion of overheads apportioned by the absorption rate to the product. On the contrary, activity based costing (ABC) has emerged as a good alternative to traditional cost estimation techniques since it provides more accurate results. It is based on the principle that products or services consume activities and activities consume resources that generate costs. This paper presents a LCC modeling approach for estimating life cycle cost of pumps using the activity based costing method. The methodology presented here is an extension of application of ABC to entire product life cycle activities. The study was conducted in a large pump manufacturing company from India that has significant global standing within its industry. All the activities and associated cost drivers have been first identified for the entire life cycle of pumps. A methodology for LCC analysis using ABC is then developed and applied to two different pumps manufactured by the same industry and the results are presented.