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ABC Enabled Life Cycle Costing - A strategic decision making tool for CAPEX investments: A new model of a forward looking LCCA evolving it from a tactical to a strategic decision making tool
KTH, School of Industrial Engineering and Management (ITM), Industrial Economics and Management (Dept.), Industrial Management.
2013 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

Life Cycle Costs has for long been confined to the corners of the engineering department as a simple backward looking tool to understand direct costs at machine level from a very constricted operational perspective. It was and is still being just used as a reference when the question of purchase of similar machines or lines come up in the future to get a ballpark idea of the direct costs to estimate an overall budget for the purchase to be proposed to the higher management. But this approach has greatly limited the scope of Life Cycle Costing which as the name suggests has a much broader implication dealing with the entire life cycle of a machine, a line, a product or a service and could be a potent aid in decision making at various time horizons of a product or service life cycle.


This thesis is aimed at presenting and illustrating one such approach that can bridge the gap between past and future costs, engineering and management decisions, and direct and overhead resource usage. To do that, we have taken two well-known concepts, Activity-Based

Costing and LCC, and merged the best parts while adding the usage of Monte Carlo simulations, uncertainty, and some additional insight. The result is an approach that is flexible, highly effective, and efficient for most cost management considerations (including LCC) and that can handle risk and uncertainty in a credible fashion. This is evident both from its theoretical foundations and also from the detailed case study provided in this thesis document. The applicability has been tested in an automotive component manufacturing giant,  in their headquarters in Italy. The thesis tends to research in scientific light the current applicability of the Life Cycle Costing and its relation to decision making and strives to broaden the scope of Life Cycle costing to a potent cost management tool which will have a strong effect on the process of strategic capital expenditure decision making and can be used in various significant areas of cost assessment. The breadth of the model enables it to be applied to cost estimations from the earliest levels of development of a product or service i.e. the concept and design phase in an all-encompassing manner considering all form of costs related to the product or service starting from the earliest costs of concept development and research to every other costs that the product or service is destined to incur in its life cycle be it direct or indirect costs with potentially analyzing all contingent costs that might arise due to risks through significant uncertainty and risk analysis in a structured framework powered by the Monte Carlo Simulation. Thus this model could unequivocally standout as an all in one solution for cost management including Life Cycle Costing in its ambit while also pitching important inputs for strategic decision making process of capital investment which tend to have very significant long term organizational implications.

Place, publisher, year, edition, pages
2013. , 149 p.
Keyword [en]
LCC, LCCA, Strategic Decision Making, ABC Costing, Manufacturing
National Category
Business Administration
URN: urn:nbn:se:kth:diva-144336OAI: diva2:713117
Subject / course
Industrial Economics and Management
Educational program
Master of Science - Industrial Engineering and Management
2013-06-28, Politecnico di Milano, Milano, 16:31 (English)
Available from: 2014-04-22 Created: 2014-04-21 Last updated: 2014-04-22Bibliographically approved

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