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Life-Cycle Accounting/Costing

Life-Cycle Accounting/Costing. Economic Metrics. Working with cost as a unit provides designers and companies a good guideline.

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Life-Cycle Accounting/Costing

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  1. Life-Cycle Accounting/Costing

  2. Economic Metrics Working with cost as a unit provides designers and companies a good guideline. However, like in LCAs, the major disadvantage of such economic metrics is the lack of hard data concerning environmental costs and profits,difficult to convert environmental impact in dollars. Formula only takes product retirement into account and no environmental cost incurred during the product’s operational life. Portions of the process costs can be assigned to the individual parts of the product and to the linking elements between the parts. Example: # of links to be disassembled S C = C + {C + C } Recollection Disassembly, i Reassembly, i i=1 # of components to be reused S + {C + C + C } Cleaning, j Check/Sort, j Reconditioning, j j=1 # of links to be separated # of materials + S {C } + S {C + C } reprocessing, k Identification, l Separation , l k=1 l=1

  3. Life-Cycle Costing • One of the key elements of each product development process is the economic evaluation of the design concepts. • Environmental impacts occur over an entire product life-cycle. Hence, the economic implications of ECDM and DFE should also be assessed over the entire product life-cycle. • The term used for this assessment is life-cycle costing (LCC). • Four most common methods for such a life-cycle economic assessment are: • Total Cost Accounting • Life-Cycle Costing • Full Cost Accounting • Environmental Life-Cycle Cost

  4. Total Cost Accounting • Total Cost Accounting (TCA) was introduced in the late 1980s with the introduction of clean production. • The method focuses on in-company assessments of cleaner production investments. • TCA can be described as a normal, long-term oriented cost acounting method which pays special attention to hidden, less tangible and liability costs. • Liability costs are fines due to liability for things as future clean-up, health care and property damage. • Less tangible costs are, e.g., consumer acceptance, corporate image and external relations. • The TCA method also focuses on the risks and hidden costs associated with a product or activity.

  5. Life-Cycle Costing • ECDM and DFE include assessments of impacts in the product life-cycle outside the producing company or Original Equipment Manufacturer. • For an economic assessment, therefore, we have to address all the costs and benefits for which actors and participants in a product’s life-cycle have to account for. • This investigation of economic impact is called Life-Cycle Costing. • Basically, LCC is an assessment of the costs in each stage of the life-cycle of a product. • The different cost factors (such as capital, labor, material, energy, and disposal) are investigated on the basis of current and future costs.

  6. Full Cost Accounting • There is an additional category of costs that should be accounted, namely, the social costs related to production, use, and disposale which are not accounted for by any of the life-cycle actors or participants. • Societal Cost Accounting or Full Cost Accounting (FCA) could be used to treat topics such as ozone layer depletion. • Because nobody is directly responsible for such issues, they are not taken into account in TCA and LCC. • The FCA method is based on the assigment of a monetary value to the material flows identified during the inventory stage of an LCA. • The monetarization of waste streams and emissions is based on a “willingness to pay” to avoid negative environmental effects. • Clearly, it is difficult to estimate the social costs associated with a single product. • The Environmental Priority System (EPS) provides a framework (see LCAs).

  7. Environmental Life-Cycle Costs • Environmental Life-Cycle Costs are costs caused by the environmental impact of the product. • The outcome of an LCA can be used as a basis for assessing the environmental life-cycle costs. • The most common method is to use standard cost factors, e.g., the costs a company has to incur to clean waste water. • Environmental Life-Cycle Cost accounting is much narrower than the preceding approaches.

  8. Life Cycle Accounting/Costing Issues • Clearly FCA is the broadest approach, followed by LCC and TCA. • More and more companies are starting to realize the importance of Life-Cycle Costing. • For example, a mercury thermostat swicth may be the cheapest alternative to buy, but when one includes the costs of disposal, a solid state switch becomes more advantageous. • To do a LCC, one basically has to follow the same four steps as in an LCA, except that the outcome is a single numerical monetary value. • Many start favoring Activity-Based Costing (ABC) as a basis for Life-Cycle Costing and accounting of environmental costs: • ABC is based on the assumption that a product uses activities rather than resources. • ABC allows not only for unit-level cost drivers, but also for batch and product level cost drivers. • Hence, ABC allows more flexibility and is superior in modeling and tracing costs. • Most noted is ABC’s capability to separate direct from indirect costs.

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