Whole life costing
Whole-life cost definition
Whole life costing
Whole-life costs are the total cost of purchasing an asset over its entire useful life. The term is also called life-cycle costing, or permanent cost, and is most commonly referred to as permanent cost or cradle to grave cost. These costs include the amortization of capital assets, the depreciation of non-operating tangible fixed assets, and the preparation and maintenance of inventories.
Most of the time, whole-life costs are believed to represent the long-term cost of owning an asset, although they can also represent the costs of doing business. This is because the value of a particular asset depreciates over time and can even become negative if it is no longer useful or necessary. One example is a chemical plant that produces toxic chemicals and produces no product for years. Over time, this asset will have to pay for expensive upkeep and maintenance as well as compensation for employees who will be laid off due to the plant closing down.
Whole-life costs must be managed carefully because they represent a large investment. For example, if the gas station that you are thinking about purchasing has a whole-life cost of around ten million dollars, then it would make sense to purchase a supply contract in order to provide the necessary maintenance to keep this asset running efficiently. Likewise, the asset owner must also account for the cost of providing the necessary collateral security for any loans used to purchase the asset, as well as the cost of paying interest on the loan, and any interest rate associated with it. While some companies try to use the low-cost or free market approach to managing these costs, other companies choose to contract with a Procurement Management Association (PMA) company to help them design life-cycle costing models that are fair to both the company and the individual business.