Whole Life Costing
Whole life costing is an economic measurement that takes into consideration the full cost of a product over its entire life, including purchase, rental or lease, service, upkeep, operation, supply, government fees and taxes. The life cycle of any entity includes its initial production, growth, expansion and disposal. Whole life costing is commonly used in the procurement of purchasing and resource allocation for business. The goal of this method of pricing is to provide a concise representation of how raw materials and working capital will impact the organization over time. This allows decision makers to evaluate investments effectively and helps them establish long term goals.
In order to apply the whole life costing method to a specific business entity, a thorough examination of the financial records for that entity should first be conducted. To begin, the company's operating income and the expenses that it incurs each month must be reviewed. These will provide a basic breakdown of how much money the company makes in a given month and a description of how those funds are being spent. Once these documents are analyzed, the company's gross and net income as well as the expenses that it incurs each month must also be reviewed.
With the review of the financial records, the nature of the products being purchased must be determined. The primary purpose of the analysis is to reduce costs associated with procurement. For example, if the products being purchased are complex and require specialized equipment, whole life costing may be utilized to determine the costs of that equipment. This will include the cost of installation, labor and material expenses associated with manufacturing and delivery. By reducing these factors, the whole life cost of procuring the supplies can be significantly reduced.
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