A new realization is spreading through our materialistic world, a new concept is gaining recognition in the commercial field and also entered our private life. It is based on the discovery that a newly bought product does not stop costing after its purchase, but keeps costing us throughout its life cycle. And, it is now realized, it is the total costs of a product, throughout its life cycle that gives us the real costs!
It is therefore often the case that an item with a cheaper purchase price but a high on-going cost factor turns out to be much more expensive than, say, an product with a higher initial cost. Seemingly more expensive at the moment of purchase, but with lower maintenance costs throughout its life-cycle, it may well be a cheaper one!
The clearest case to demonstrate this may be a car, purchased at a higher price, but with lower on-going running, maintenance and replacement costs it may turn out to be the actually cheaper or cost effective vehicle than, say, a cheaper car purchased at the spur of the moment but with high on-going maintenance costs plus a petrol thirst to match.
In many hospitals and nursing homes the installation of a flooring with a polyurethene wear layer will reduce the cleaning costs by up to fifty percent. The initial purchase of such a flooring may be dearer but, as a result of a decision in its favour, the cleaning costs in these institutions may half. If a medium-size nursing home has an annual cleaning bill of $ 200 000.--, the saving is often more than $ 100 000.--, resulting in a saving of $ 1000 000.—within ten years. This amount thus saved may be used for healing people or caring for them!
This principle of cost-effectiveness applies to every item, – the total cost throughout its life-cycle give us the real or total costs. In our fast-living consumer society, where products are being bought purely by comparing prices, in the end, more money will have to be spent as these may not last as long or when repairs set in. Do we remember our grandparents’ solid oak furniture that have been passed down through generations? Rock-solid, they have outlived many fashion furniture that have been acquired for no other reason than being perceived as ‘cheap’ and subsequently had to be replaced several times over.
But times are changing and we become more and more enlightened when investing in new items and equipment.
Accounting has also changed and new factors are being considered when deriving a true cost factor of an item: Not only do we now state the purchase price, but also incorporate a replacement value and disposal cost before we are able to determine our total cost of a product.
This is already law in an increasing number of countries as the cost of disposing of material in a responsible way is costly too and has to be incorporated already in the cost price and subsequently in a purchase price.
To derive at all these new cost factors may require some investigative work, however, there are now in the professional field an increasingly number of life-cycle-cost experts with all their facts already recorded in their specialized software for instant assistance. Sometimes they are called Logisticians or have other specialized names and are already indispensible in some industries.
Therefore, the total sum of a product’s cost factors, plus the on-going costs throughout a products life-time, are the true expenses for the customer and when calculated that way, responsible accounting will ensure business success.