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Product life cycle cost

analysis: State of the art
review
Y. Asiedu & P. Gu
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2010.
To cite this article: Y. Asiedu & P. Gu (1998): Product life cycle cost analysis:
State of the art review, International Journal of Production Research, 36:4,
883-908
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int. j. prod. res., 1998, vol. 36, no. 4, 883± 908
Product life cycle cost analysis: state of the art review
Y. ASIEDU² and P. GU³ *
In an attempt to improve the design of products and reduce design changes, cost,
and time to market, concurrent engineering or life cycle engineering has emerged
as an e ective approach to addressing these issues in today’s competitive global
market. As over 70% of the total life cycle cost of a product is committed at the
early design stage, designers are in a position to substantially reduce the life cycle
cost of the products they design, by giving due consideration to life cycle cost
implications of their design decisions. Increasing recognition of cost competition
has spurred the development of methodologies such as design for manufactur-
ability, design for assembly (DFA), design for producibility, design for maintain-
ability and design for quality, in the design for `X’ realm. Although these
methodologies have for the most part proven successful in reducing cost, the
design evaluation criterion in most of these methodologies is not cost.
Therefore methodologies and tools are needed to directly provide cost informa-
tion to designers. Life Cycle Cost (LCC) analysis provides a framework for
specifying the estimated total incremental cost of developing, producing, using,
and retiring a particular item. This paper looks at the issues of LCC analysis and
the tools that have been developed to provide engineers with cost information to
guide them in design.
1. Introduction
The ability of a company to compete e ectively on the increasingly competitive
global market is in¯ uenced to a large extent by the cost as well as the quality of its
products and the ability to bring products onto the market in a timely manner. It has
been recognized that a life cycle engineering approach to the design of products has a
great potential to achieve these goals. An engineering design should not only trans-
form a need into a description of a product but should ensure the design’ s compat-
ibility with related physical and functional requirements. Therefore, it should take
into account the life of the product as measured by its performance, e ectiveness,
producibility, reliability, maintainability, supportability, quality, recyclability, and
cost (Fabrycky and Blanchard 1991). Studies reported in Dowlatshahi (1992) and by
other researchers in design suggest that the design of the product in¯ uences between
70% and 85% of the total cost of a product. Designers are therefore in a position to
substantially reduce the life cycle cost of the product they design by giving due
consideration to life cycle cost implications of the design decisions they make.
Increasing recognition of cost competition has spurred the development of meth-
odologies such as design for manufacturability, design for assembly (DFA), design
Received March 1997.

²Department of Mechanical Engineering, University of Saskatchewan, Saskatoon, SK
S7N 5A9, Canada.
³ Department of Mechanical and Manufacturing Engineering, The University of Calgary,
Calgary, AB, T2M 1N4 Canada.
* To whom correspondence should be addressed.
0020± 7543/98 $12. 00 Ñ 1998 Taylor & Francis Ltd.
884 Y. Asiedu and P. Gu
for producibility, design for maintainability and design for quality, in the design for
`X’ realm.
Cost can be employed as an evaluation criterion in design in two ways. It can be
used either in a design-to-cost or design-for cost context. Design-for-cost is the
conscious use of engineering process technology to reduce life cycle cost while
design-to-cost obtains a design satisfying the functional requirements for a given
cost target (Dean and Unal 1992) (further detailed distinction between the two
and the merits and demerits of the two approaches can be found in this reference).
While the aforementioned methodologies have on the most part proven successful in
reducing cost, the design evaluation criterion in most of these methodologies is not
cost. There is therefore a need for methodologies that directly address the issue of
providing cost information to the designer irrespective of the design context in which
the cost information is used. This paper looks at the issue of life cycle cost (LCC)
analysis and the tools that have been developed to provide engineers with cost
information to guide them in design.
The LCC concept was initially applied by the US Department of Defense (DoD).
Its importance in defence was stimulated by ® ndings that operation and support
costs for typical weapon systems accounted for as much as 75% of the total cost
(Gupta 1983). However, most of the methodologies developed by the DoD were not
intended for use for design but for procurement purposes. Recognizing the need for
more extensive application of engineering economy methodologies in the planning
and control of systems for the production of goods and services, the US National
Science Foundation sponsored a joint academe-industry conference in 1984
(Fleischer and Khoshnevis 1986, Fabrycky 1987), where thirty-four researchable
opportunities were identi® ed and prioritized. Ranking by a scoring model, the two
research areas receiving the highest scores were `economic evaluation of design trade-
o s over the life cycle and CAD-CAE (computer-aided estimating).
As stated earlier there are a number of methodologies that can be used in our
e orts to design cost-e ective products; however, in this paper we are going to focus
on the actual estimation of cost and how cost information can be used in the design
process. The outline of the rest of the paper is as follows. In the next section, we look
at life cycle and the speci® c cost issues we should be addressing in life cycle design. In
§ 3, the various methods used in estimating cost and cost modelling in LCC analysis
are discussed. A few models that have been developed for use in design are discussed
in § 4. Section 5 contains a summary of the works reviewed in this paper.
2. Life cycle approa ch to design

In an attempt to improve the design of products and reduce design changes and
time to market, concurrent engineering or life cycle engineering has emerged as an
e ective approach to address these issues in today’s competitive global market. The
principal unique aspect of life cycle engineering is that the complete life cycle of the
product is kept in consideration and treated in each phase of the product develop-
ment (Keys 1990). Life cycle engineering goes beyond the life of the product itself
and simultaneously considers the issues of the manufacturing process and the prod-
uct service systems. There are actually three coordinated life cycles that need to be
considered in life cycle product design. Figure 1 illustrates these parallel life cycles
which are initiated when the need for the product is ® rst recognized.
The life cycle of the product begins with the identi® cation of the needs and
extends through design, production, customer use, support, and ® nally, disposal.
Product life cycle cost analysis: state of the art review 885
Figure 1. Parallel life cycles in product development.
Alting (1993) distinguishes between six phases in a product’s life: need recognition,
design development, production, distribution, use, and disposal. However, in this
paper as in most other papers, we distinguish between only four phases; design
development, production, use, and disposal. The process life cycle begins with the
de® nition of the production task by the preliminary product design (Kriwet et al.
1995). This entails production planning, plant layout, equipment selection, process
planning and other similar activities. The third life cycle which deals with logistic
support should also be initiated at the preliminary design phase. This involves the
development of support for the design and production stages, consumer support and
maintenance during the product usage and support for product recycling.
In suggesting a life cycle engineering approach to design, Alting (1993) also
identi® ed a number of issues that need to be addressed. These are, ease of manu-
facture, environmental protection, working conditions, resource optimization, life
cycle cost and product properties. We intend to concentrate on life cycle cost in this
paperÐ however, it must be mentioned that these issues are interrelated and one
cannot look at a particular one without giving any consideration to the others.
2.1. Cost issues in life cycle design

The life cycle cost of a product is made up of the costs to the manufacturer, user,
and society. This is depicted in Fig. 2. The total cost of any product from its earliest
concept through its retirement will eventually be borne by the user and will have a
direct bearing on the marketability of that product (Wilson 1986). As purchasers, we
pay for the resources required to bring forth and market the product and as owners
of the product, we pay for the resources required to deploy, operate and dispose of
the product. The total life cycle cost can be decomposed into cost categories as
shown in Fig. 3. This decomposition is known as a cost breakdown structure
(CBS) (Fabrycky and Blanchard 1991, Ahmed 1995). The CBS shown in Fig. 3 is
by no means the most comprehensive and representative of all products or any
product for that matter. The level of breakdown and the cost categories considered
will depend on the stage we want to use the model, the kind of information to be
extracted from the model, the data available as input to the model and the product
being designed/purchased.
While the life cycle cost is the aggregate of all the costs incurred in the product’s
Figure 2. Life-cycle stages and costs (adapted from Atling 1993).
life, it must be pointed out that there are di erences between the cost issues that will
be of interest to the person designing the product and the ® rm developing the
product in a life cycle cost analysis. While the ® rm must know the total cost of
the product, the designer is only interested in the costs that he/she can control.
Some of the costs incurred in the life of the product are not as a result of the design.
These costs are related to the `way we do things’. Life cycle cost can thus be classi® ed
into management related costs and design related costs. It is the latter component
that the designer is interested in. One cost category that may not be of interest to the
designer is the research and development cost. This cost is not related to the actual
design of the product but rather to the kind of product we are developing, the
resources we commit to the process and the manner in which we use these resources
to arrive at a design solution. The discussion in the remainder of this section looks at
the cost issues in the production and construction, usage and disposal phases of
products. Needless to say there are other cost categories in these phases of the
product life cycle that the designer cannot in¯ uence.
2.1.1. Production and construction cost

The cost in this phase consists of things such as manufacturing (fabrication,
assembly and test), facility construction, process development, production opera-
tions, quality control, and initial logistic support requirements (e.g. initial consumer
support, the manufacture of spare parts, the production of test and support equip-
ment, etc. ) (Fabrycky and Blanchard 1991).
The primary focus in this phase is on determining the optimal design of the
product and sequences of processes to produce and assemble the constituent parts
into a complete product. We are also concerned about the logistic support needed to
bring forth the product. Increasingly, this component is becoming a large proportion
Figure 3. Cost breakdown structure (Fabrycky and Blanchard 1991).
of the total production and construction costs. Another concern in this phase is the
e ect of the activities on the environment. This together with other environmental
concerns will be discussed in § 2.1.3.
Most of the work done in the `design for ``X’’ ’ realm deals with this phase of the
product life cycle. The most successful methodologies are the design for assembly
(DFA ) principles developed by Boothroyd and Dewhurst (Dewhurst and Boothroyd
1984, Boothroyd 1994) and the Hitachi assembly evaluation method (AEM) devel-
oped by Hitachi (Miyakawa and Ohashi 1986). These methods evaluate an assembly
based on a number of DFA criteria and compute a numerical score which is intended
to predict the ease of assembly and suggest ways to improve the design to reduce the
cost of the assembly.
2.1.2. Operation and support cost

The cost at this stage comprises consumer or user operations of the product in
the ® eld, product distribution (marketing and sales, transportation and tra c man-
agement), and sustaining maintenance and logistic support throughout the system or
product life cycle (e.g. customer service, maintenance activities, supply support, test
and support equipment, transportation and handling, technical data, facilities,
system modi® cations, etc. ) (Fabrycky and Blanchard 1991).
Operating and support costs are the most signi® cant portion of the LCC and yet
are the most di cult to predict. US government records have shown that the cost of
operating and supporting an item may exceed the initial purchase price of that item
as much as ten times (Wilson 1986). A product which is reliable and easily service-
able leads to maximum availability and maximum customer satisfaction. To improve
customer satisfaction, companies have started to address the issue of making prod-
ucts which can be maintained in the least time, at the least cost and with a minimum
expenditure of support resources, without adversely a ecting the item’s performance
or safety characteristics. Support resources are manpower utilization, spare parts,
tools, test equipment, services, and support facilities. The larger and more complex a
system, the greater is the capital investment it will represent and the greater its likely
revenue-earning capacity. Each minute out of service is therefore going to result in
considerable ® nancial loss to the system user. The time (hence cost) of carrying out
maintenance action should therefore be minimized. This time is made up of active
and passive repair times. The components of the active repair time which are de® ned
below are the times that can be in¯ uenced through the design of the product (Smith
and Babb 1973).
Localization: determining the location of a failure to the extent possible with-

out using accessory support equipment.
Isolation/diagnosis: determining the location of a failure through use of access-
ory support equipment.
Disassembly/access: equipment disassembly to the extent necessary to gain
access to the item that is to be replaced.
Interchange: removing the defective item and installing the replacement.
has been made.
Reassembly: closing and reassembly of the equipment after the replacement
Alignment: performing an alignment, minimum tests, and/or adjustment made

necessary by the repair action.
Veri® cation/checkout: performing the minimum checks or tests required to
verify the equipment has been restored to satisfactory performance.
It must be mentioned that for preventive maintenance, localization and isolation/
diagnosis are not part of the active times. On the other hand, these times form a
signi® cant portion of corrective maintenance which is that maintenance performed
to restore an item to satisfactory condition after a malfunction has caused degrada-
tion of the item below the speci® ed performance level. In Ru and Paasch (1993),
it is reported that diagnosis forms about 30± 50% of the repair time for some
systems.
2.2.3. Retirement and disposal cost

Development, use and retirement of products require the use and conversion of
material and energy resources. These activities cause waste to be released into the
environment as depicted in Fig. 4. Because energy consumption, air pollution and
waste management currently dominate public discussions and will continue to do so
in the future, environmentally clean products and manufacturing technologies will
Figure 4. Product life cycle and recycling (adapted from Ishii et al. 1994).
have to be developed by companies who want to be able to compete (Weule 1993).

Of particular signi® cance is recent take-back laws in some countries. Legislation in
many EU countries is increasingly guided by the `originator principle’: he who
in¯ icts harm on the environment has to pay for cleaning up the damage (Zussman
et al. 1994). This, together with other factors such as corporate image and public
perceptions, consumers’ demand for green products and rising waste disposal costs,
has led to a surge in research activities in the ® eld of environmental impact assess-
ment (see Navinchandra 1991, Zust and Wagner 1992, Benda et al. 1993, Tipnis
1993, Zussman et al. 1994, Sullivan and Young 1995).
Life cycle assessment (LCA) is the framework that has been proposed for the
study of the impact products and processes have on the environment. LCA is an
environmental and energy audit (accounting procedure) that focuses on the entire
life cyle of a product from raw material acquisition to ® nal product disposal of
environmental emission (Benda et al. 1993, Weule 1993).
A complete life cycle analysis consists of an environmental audit of ® ve major
sections. These are raw materials acquisition, product and packaging manufacturing,
consumer use, recycling and ® nal disposal (Benda et al. 1993).
Although LCA appears sound conceptually, in practice it is a very di cult task
to carry out. It tends to be cumbersome. Reliable environmental data for materials
and processes are scarce and there is a lack of a broad-based consensus on how to
value or assess dissimilar impacts (Glantsching 1994). In addition, impacts caused by
product usage and disposal are di cult to assess quantitatively since they depend on
factors that are di cult to predict or anticipate. At present a complete model which
contains all the necessary parameters and relevant data does not exist (Weule 1993).
Attention is currently focused on the product end-of-life (Zussman et al. 1994). The
options available at the end of the products life are depicted in Fig. 4. These terms
are de® ned as follows:
(1) Recycling: the use of waste or a waste-derived material as a raw material for
products which may or may not be similar to the original. When this process
is selected for the unserviceable product, the product will be disassembled for
recycling operations (Yan and Gu 1995).
(2) Remanufacturing: through certain refurbishing or restoration processes,

some unserviceable products can regain the function and performances of
the products which are similar to new ones (Yan and Gu 1995).
(3) Reuse: further use of a waste product in its original form, such as the re® lling
of a previously discarded container (Yan and Gu 1995).
(4) Disposal: this refers to the elimination of the waste product without recover-
ing any intrinsic value (Ishii et al. 1994).
Since it is rarely possible to recycle a product completely, the aim is to maximize
the recycled resources while minimizing the e ort that has to be invested (Kriwet et
al. 1995). Disassembly cost is a key factor in the analysis for product retirement (Ishii
et al. 1994). The role of product disassembly on product retirement and service for
that matter, is discussed in detail in Jovane et al. (1993 ), Scheuring et al. (1994) and
Zussman et al. (1994) .
3. Life cycle cost analysis

Typically, design and economic justi® cations have been considered as two sepa-
rate undertakings. Though they both have the common goal of arriving at a com-
petitive product, their goals are diametrically opposite to each otherÐ the goal of
designing the best product possible is often contrary to the goal of cost minimization
(Noble and Tanchoco 1990). As stated earlier, it has been reported that during the
design stage, most (between 70± 85%) of the total life cycle cost of a product is
committed. This can be reduced by giving due consideration to life cycle cost
issues early in the design. LCC analysis provides the framework for specifying the
estimated total incremental costs of developing, producing, using, and retiring a
particular item. The DoD developed life cycle costing in the early 1960s to increase
the e ectiveness of government procurement (Shields and Young 1991). The DoD
was mostly interested in being able to set design-to-cost targets and for competitive
source selection. Some of the procedures and policies of the DoD during this time
are discussed in the following referencesÐ Metzler (1974), Gansler (1974), Earles
(1974 ), Dixon and Anderson (1976), Caver (1979), Dighton (1980). Prior to the
1970s the concept of integrating product design and economic modelling had
received little attention. Pugh (1974) was among the ® rst to make mention of pro-
viding economic information to the designer. The importance of cost modelling in
the design stage has also been reported by various authorities such as Boothroyd and
Dewhurst (1983a), Ehrlenspiel (1987), Wierda (1988), and Alting (1993) . Through
early implementation, cost analysis can not only in¯ uence the ® nal design by provid-
ing the relevant cost information but can also contribute to cost reduction by iden-
tifying cost drivers and how changes in design parameters a ect cost.
There are many di erent facets of a product that can be studied using a LCC
model and it is relatively easy to become overwhelmed by undertaking too large an
e ort or by proceeding in the wrong directions (Fabrycky and Blanchard 1991). An
important initial step is the classi® cation of the analysis objectives and the bounding
of the problem such that it can be studied in an e cient and timely manner.
Speci® cally, LCC analysis can be employed in the evaluation of Blanchard (1979):
(1) Alternative system/product operational utilization and environmental pro-
® les (i.e. consumer user plans);
(2) Alternative system maintenance concepts and logistics support policies;
(3) Alternative equipment design con® gurationsÐ packaging schemes, diag-

nostics, routines, built-in test versus external test, condition monitoring
provisions, manual functions vs automation, component selection and
standardization, reliability versus maintainability, levels of repair vs discard
decisions, and more;
(4) Alternative production approachesÐ continuous vs discontinuous produc-
tion, quantity of production lines, number of inventory points and levels of
inventory, levels of product quality inspection and test alternatives, and so on;
(5) Alternative procurement sources and the selection of a supplier for a given
item;
(6) Alternative product distribution channels, transportation and handling
methods, warehouse locations, and the like;
(7) Alternative maintenance plansÐ customer service levels, sustaining supply
support levels, maintenance functions and talk, preventive vs corrective,

duration of service policies, producer vs consumer maintenance contract
warranty provisions, and so on;
(8) Alternative product disposal and recycling methods;
(9) Alternative management policies and their impact on the system.
Cost estimation is usually done by professional estimators who might have little
or no design experience and may or may not be an integral part of the design process.
The estimates done by the designer and the professional estimator tend to di er.
Because the estimator can put more time and e ort into his/her calculations, his/her
estimates are more accurate. Also the designer does not have the estimator’s skill and
experience. Furthermore, the estimator will be satis® ed if he/she obtains a reasonable
estimate (Weirda 1988). The cost estimating community rarely focuses on why a
system will cost what it will (Dean 1993). The designer on the other hand will not
be satis® ed with just an estimate: seeing the estimate his/her search for an under-
standing of why the product costs what it does and for more cost-e ective solutions
is yet to begin. The most important task for the designer therefore is the relationship
between cost information and design decisions. It is therefore important that we
develop tools that give the designer quick and accurate estimates of the ® nancial
consequences of his/her design decisions and procedures to determine optimal design
parameters. CAD systems can provide the necessary integration of design and cost
engineering (Westney 1983, Fleischer and Khoshnevis 1986, Ehrlenspiel 1987,
Wierda 1988). This integration can be accomplished by constructing, on the CAD
system, design cost and optimization models.
Based on the length of the life cycles, products can be grouped into three broad
categories (Lee and Melkano 1993). These are large scale, mid scale, and small scale
as shown in Fig. 5. The distinction between the di erent types of cycles is important
from a life cycle analysis perspective because the types of tradeo s and analytical
models that are employed for a large scale development e ort might not be as
e ective for a small scale process (Lee and Melkano 1993). For example, for a
small scale product, we shall be more interested in minimizing the production and
recycling cost since the operation and support cost is very small as opposed to giving
more consideration to the operation and support cost of a large scale product. Also
for a small scale product, the time period is so small that a state of certainty can be
assumed for most of the input parameters to the LCC model while uncertainties about
the future states of parameters abound in the case of a large or mid-scale product.
Figure 5. Product classi® cation by length of life-cycles (adapted from Lee and Melkano
1993).
3.1. Cost estimating approaches

Depending on the stage of the analysis and the level of detail expected, an LCC
model may be a simple series of cost estimation relationships (CERs) or a set of
computer subroutines. LCC analysis during the conceptual or preliminary design
phases may require the use of basic accounting techniques and the model may be
rather simple in construction (Fabrycky and Blanchard 1991). On the other hand,
life cycle cost analysis done during the detail design stage may be more elaborate.
Just as the design process produces lower level functional requirements through
functional decomposition to enable design solutions to be easily developed, it is
imperative that we perform a cost decomposition. Such a decomposition is known
as a cost breakdown structure (CBS). (An alternative approach is the concept of
function cost presented in French (1990). This is based on the principle that many
functions can be quanti® ed and the costs associated with a function are often simply
related to the quantity or qualities. This approach decomposes the product by func-
tion and quanti® es and costs each function. ) A sample of this was shown in Fig. 3.
Cost function/models can then be allocated to the various categories to allow for the
easy calculation of the total cost.
Estimating models used in industry can be broadly classi® ed as parametric
models, analogous models (estimating by analogy) and detailed models. These are
explained in the following sections.
3.1.1. Parametric models

Parametric estimating is the generation and application of equations that
describe relationships between cost schedules and measurable attributes of a
system that must be brought forth, sustained and retired (Dean 1995). Cost estima-
tion with a parametric model is based on predicting a product’ s (or component’s)
cost either in total or for various activities, e.g. design or manufacture, by the use of
regression analysis based on historical cost and technical information. The statistical
methods correlate costs and technical information with parameters describing the
system and results in sets of formulae, called CERs. The parameters typically include
manufacturing complexity, design familiarity, weight, and performance. A simple
CER is the relation between the cost of buildings and the ¯ oor area.
Parametric estimating can involve considerable e ort because of the systematic
collection and revision process required to keep the CERs updated, but once this
data is available estimates can be produced fairly rapidly (Greves and Schreiber
1993). Fad and Summers (1988) suggest that it be used throughout the design pro-
cess. In addition, parametric models that have been developed to facilitate this
process are now available commercially. The most widely used is the Lockheed
Martin PRICE system. This is used by establishments such as the British
Aerospace Corporation (Daschbach and Apgar 1988), the European Space
Agency (Greves and Schreiber 1993) and NASA (Dean 1989). An illustration of
its use is given in Burmeister (1980). One other drawback of parametric estimating
is that it is not very good for estimating the cost of products that utilize new
technologies. Parametric estimating is often referred to as a `top-down’ estimating
technique.
3.1.2. Analogous models

Cost estimating made by analogy identi® es a similar product or component and
adjusts its costs for di erences between it and the target product (Shields and Young
1991). The e ectiveness of this method depends heavily on an ability to identify
correctly di erences between the case in hand and those deemed to be comparable
(Greves and Schreiber 1993). The main disadvantage of estimating by analogy is the
high degree of judgment required. Expert judgment and complete familiarity with
the product and processes are required to identify and deal with similarities and
make adjustments for perceived di erences. This approach though tends to be
very good for new products.
3.1.3. Detailed models

A detailed model uses estimates of labour time and rates and also material
quantities and prices to estimate the direct costs of a product or activity (Shields
and Young 1991). An allocation rate is then used to allow for indirect/overhead
costs. This is known as bottom-up estimating and is widely used by organizations to
build up estimates from task or work-package level (Greves and Schreiber 1993). It is
the most time consuming and costly approach and requires a very detailed knowl-
edge of the product and processes. However, the most accurate cost estimates can be
made using this approach.
In principle it is a simple method: determine the time needed to perform an
activity and the hourly rates for the man and machine, then multiple times and
rates to get the costs. Time standards can be industry standards, in-house standards
or based on expert guesses. In-house standards are the best but most di cult to
develop. Industrial time standards for production operations exist for many
common tasks. These are best applied when a long and stable production of identical
items is contemplated (Fabrycky and Blanchard 1991). They are not very useful for
estimating for complex systems in which one of a kind is to be produced.
This approach is ¯ exible. The information used is basic information and can
therefore be used on numerous occasions. The other estimating techniques
demand one or more existing products that resemble the new product in some
way. The main di culties of the method include (Weirda 1988):
(1) Determining or collecting the basic standard times;

(2) Determining the hourly rates and keeping them up to date;
(3) Management of a large amount of information;
(4) A large number of simple but tedious calculations, and
(5) The skill and experience required to use the basic information properly.
3.2. Accuracy in cost estimating

In a competitive situation if a company’s estimates of its costs is unrealistically
low (underestimate) then it may obtain an order but risks making a ® nancial loss. On
the other hand, an overestimate of costs will cause the company to lose orders. The
accuracy of cost estimates is therefore very essential to the survival of an organiza-
tion. Good estimates are not only essential for external use (e.g. contract bidding)
but also for internal use (e.g. cost control, budgeting). The relationships between the
over- and underestimates and the cost of products can be represented by the Freiman
curve. This is shown in Fig. 6. What the graph shows is that:
(1) The greater the underestimate, the greater the actual expenditure;
(2) The greater the overestimate the greater the actual expenditure;
(3) The most realistic estimate results in the most economical project cost.
Figure 6. The Freiman curve (Daschbach and Apgar 1988).

When costs are underestimated, initial plans for sta ng, scheduling, machine pro-
cessing, tooling etc., are not achievable. Though plans are established to realize the
underestimated cost, it becomes di cult for cost targets to be met as the project
progresses. In response, there is a reorganization, replanning and possibly the addi-
tion of personnel and equipment (Daschbach and Apgar 1988). These tend to incur
costs that were not originally budgeted for, resulting in an eventual increase in cost.
On the other hand, when costs are overestimated, rather than resulting in greater
pro® ts, the overestimate re¯ ects a Parkinson’ s law application: the money is avail-
able, it must be spent (Daschbach and Apgar 1988). Unless there is ® rm management
control, there is a self-ful® lling prophesy and it will be virtually impossible to reduce
cost.
In the development of output cost data, the requirements may vary considerably
depending on the program phase, the extent of product de® nition and the type and
depth of the analysis being accomplished (Fabrycky and Blanchard 1991). During
the early planning and conceptual design stages of system development, available
data are limited and the cost analyst must depend primarily on the use of various
parametric cost estimating techniques in the development of cost data. The cost
estimates at this level have a - 30 to + 50% accuracy (Creese and Moore 1990).
As the system design progresses, more complete design information becomes avail-
able and cost estimates can be made by comparing the characteristics of the new
system with similar systems where historical cost data are available (Fabrycky and
Blanchard 1991). The generation of cost data is often based on analogous and
detailed estimating methods. The cost estimates in this stage are for budgetary
purposes and would be in the - 15 to + 30% range (Creese and Moore 1990).
Finally, at the detail design stage, all of the information about the product must
be known such as complete product design details incuding dimensions and ® nishes,
the speci® c process operation and process parameters, the requirement for product
support and product reliability and even the product disposal requirements. Detailed
estimating models are used frequently at this stage. Cost estimates should be within
- 5 to + 15% (Creese and Moore 1990).
3.3. Cost accounting and cost estimating
What we view as the cost of a product or activity depends on the cost accounting
concept employed in calculating the cost. Currently, there is a choice between so-
called traditional accounting methods and activity/transaction based methods (other
emerging accounting concepts are discussed in Rabino and Wright (1993)) Activity
Based Costing (ABC) is currently gaining grounds on traditional cost accounting
approaches and a number of publications (Miller and Vollmann 1985, Kaplan 1989,
Cooper 1990 a, b; Dolinsky and Vollmann 1991, Cooper and Kaplan 1992, Rabino
and Wright 1993, Argyris and Kaplan 1994) have discussed the superiority of ABC
over traditional accounting systems and how ABC should be implemented. Our
intention is not to contribute to the debate over which method is superior but to
point out some of the shortcomings of traditional cost accounting systems and the
features of the ABC concept.
Traditional management accounting methods that were developed decades ago
when product diversity was low, production processes were largely driven by direct
labour, and information processing costs were high, are not adequate for today’s
technologically advanced and globally competitive environment (Kaplan 1989). The
signi® cant problem with the traditional accounting system is the allocation of over-
head/indirect costs. Overhead is generally allocated based on the direct labour cost
and in a few instances on direct material cost. As companies automate, the amount
of direct labour decreases and the `hidden’ factory costs rises dramatically,
approaching 50% at many companies while direct labour is as low as 5%
(Huthwaite 1989). Hidden costs include documentation, depreciation, engineering
changes, rework, inspection, and repair. One survey shows that overhead costs
represent 35% of product cost in the typical US company and about 26% in a
typical Japanese company (Dolinsky and Vollmann 1991). This has led to distortions
in product costing. Today, there is a move in the accounting profession to track
overhead to the processes that drive them by employing ABC. ABC traces costs to
products based on each product’s consumption of activities. Activities can be classi-
® ed into four general activity categories. These are, unit, batch, product and factory
level activities. The measure of the demand of an activity is known as the cost driver.
The unit price of a cost driver is known as the consumption intensity. The cost of an
activity is thus given by the product of the total amount of the cost driver used by the
activity and the consumption intensity.
There have been suggestions that ABC also encourages better product designs
(Huthwaite 1989, Kaplan 1989, Brooks et al. 1993) and that ABC should be used in
cost analysis during design if we expect to develop cost competitive products. It must
be mentioned though that ABC is not a panacea for the problems confronting
designers and furthermore, in certain instances such as single product and JIT set-
tings, ABC does not o er much advantage over traditional costing systems.
3.4. Certainty, risk, uncertainty, and dependency

Cost estimates are decisions about what costs will be in the future. The accuracy
of the estimate is inversely proportional to the span of time between the estimate and
the event (Ostwald 1974). Like all decisions, cost estimates can be classi® ed as those
made under certainty, risk, or uncertainty.
The simplest of the states of nature is that of certainty (Ostwald 1974). A decision
under certainty is one in which each action always results in the same speci® cally
known outcome (Jelen and Black 1983). This seldom exists in nature or in compe-
titive society but can be assumed by ignoring complications. This assumption is fully
warranted in some casesÐ labour cost, production rates, or material costs are some-
times stable especially in the short term. In certain instances it is expedient to make
these assumptions to expedite a workable means of analysis.
A decision under risk is one in which each action may result in more than one
outcome, depending upon the state of nature, each state of nature (and hence out-
come) having a known or presumably known probability (Jelen and Black 1983).
Situations involving risks are appropriate whenever good estimates of the probabil-
ity of future conditions can be determined. Risk is de® ned where each of several
outcomes is assigned a probability and their sum equals 1. The probabilities for
certain parameters like the failure of designs can be estimated by experts (Ostwald
1974). These probabilities are usually subjective as actual measurements are either
impossible or undesirable.
Engineering physical laws, which depend to an extent on well-ordered cause and
e ect relationships, are unlike economic laws which depend on the reaction of people
(Ostwald 1974). Accordingly, the state of uncertainty is more applicable in cost
estimating. A decision under uncertainty is one in which each action may result in
more than one outcome, depending upon the state of nature but each state of nature
has an unknown probability (Jelen and Black 1983).
Under the subjective interpretation of probability, it is always possible to assess
probabilities for the possible events or states of the world. Hence, the risk versus
uncertainty dichotomy is nonexistent and any decision-making problem in which the
state of the world is not known for certain is said to be decision making under
uncertainty. There are four basic problems which should be considered in any treat-
ment of uncertainty (McNichols 1979). These are, generation of individual cost
element distributions, generation of additive distributions, generation of compound
distribution and treatment of dependency between cost elements. McNichols (1979;
1983) and Tzemos and Dippold (1986) suggested that these problems are better
solved using analytical approaches and have developed mathematical approaches
to solve them.
LCC models are essentially predictive in nature and characterize a stochastic

process involving several parameters such as reliability, maintainability and interest
rates (Gupta 1983). In light of advancing technological boundaries and uncertainty
about the state of the world, the parameters in the equations of a LCC model should
be considered as random variables in a probabilistic sense (McNichols 1979).
Although these parameters and costs may not be independent (Gupta 1983), for
years cost analysts have simply ignored the problem of dependence or treated it
casually. McNichols (1983) and Gupta (1983) believe it is better to make explicit
assumptions about the degree of correlation (dependency) between variables or
equations than to ignore it and thereby assume it is zero. However, it should be
mentioned that the achievement of an LCC analysis including uncertainty and
dependencies could result in cost ine ectiveness, i.e. the savings from this will not
be worth the e ort to achieve it.
4. A review of cost models

There are di erent approaches to developing cost models for LCC analysis. Most
LCC models are structured along 3 general lines: conceptual, analytical and heuristic
(Kolarik 1980, Gupta 1983). Conceptual models consist of a set of hypothesized
relationships expressed in a qualitative framework. They are generally very ¯ exible
and can accommodate a wide range of systems. These models are generally con-
structed at the macro level. They allow a minimum of details and little ability to
quantify a system’s cost characteristics. Conceptual models are limited when it comes
to applied analyses (Kolarik 1980). Analytical models are usually based on mathe-
matical relationships which are designed to describe a certain aspect of a system/
product under certain conditions/ assumptions. These assumptions tend to restrict or
limit the model’ s ability to re¯ ect the actual system’s performance. Heuristic models
are ill structured analytical models, usually employing an approach which produces
a feasible and su cing solution but does not guarantee an optimal solution (Gupta
1983). These models are usually developed through the use of computer simulation
(Kolarik 1980). Heuristic models are not as general as analytical models and can
normally only be used for the speci® c situation for which they are intended.
Some authors have focused on presenting frameworks to be used for LCC analy-
sis while others have focused on developing models to be used for the evaluation of
cost. For the most part, these models have been developed for use in speci® c phases
of the product life cycle or for speci® c operations in a particular life cycle phase.
However, since a complete life cycle model will require the development of
submodels for di erent cost categories in di erent life cycle phases, we present in this
section some of these models and modelling paradigms that have been developed.
No attempt is made to categorize the models as conceptual, analytical, or heuristic.
Greenwood and Reeve (1992) presented a comprehensive activity-based frame-
work for supporting operational decision making which allows managers to predict
activity and process costs under alternative product design and production. The
architecture described supports process analysis, product costing, and simulation.
The framework presented in not easy to understand and as the authors noted at the
end of the article, `the framework o ered in this article is not simple. Indeed, this
framework is likely unworkable except in advanced manufacturing environments’.
Though the authors indicated that it is intended to be used for predictive purposes, it
does not deal with uncertainties. However, uncertainty is always associated with
predictions and it is a predominant factor in design.
An investigation of the potential application of neural networks to cost estimat-

ing problems is presented in De la Garza and Rouhana (1995). Multiple regression
analysis is used as an example of establishing a cost estimating relationship and the
results of the regression models compared with those obtained using a self training
neural network methodology. Although both of these methodologies use a para-
meter-based approach in modelling cost, the computational techniques used to ana-
lyse cost data and produce results are signi® cantly di erent (De la Garza and
Rouhana 1995). While the regression analysis ® ts a curve to a set of data, the
neural network approach uses the data to train the network to predict cost.
Neural network computing technology eliminates the need for ® nding a good cost
estimating relationship that mathematically describes the cost of a system as a func-
tion of the product parameters (De la Garza and Rouhana 1995). In addition, the
neural network technique has no restrictions on the number of cost variables or the
relevance of choosing these variables in modelling the cost function; this is due to
the neural networks’ ability to self-organize and learn. Some problems with neural
networks are (De la Garza and Rouhana 1995):
(1) Designing the network architecture and setting its parameters takes too much
time and requires a trial and error approach;
(2) It is di cult to ® nd a learning technique suitable for all applications.
The authors also note that a neural network does not do well in applications where
precise numerical computations are required like detailed estimating and cost con-
trol.
Noble and Tanchoco (1990) presented a conceptual framework for the concur-
rent design and economic justi® cation of systems. They proposed a design justi® ca-
tion environment that allows the decision maker to see the potential economic
implications of di erent design alternatives. The cost of manufacturing the product
was divided into ® xed and variable components and allocated on a per unit basis.
While the framework is useful, the model is based on traditional accounting concepts
and as stated earlier, traditional accounting concepts are not very useful for accurate
cost tracing.
A multistage integrated decision model in which decisions on product and pro-
cess design are simultaneously made and supported by economic evaluation at each
stage of the manufacturing process is presented in Oh and Park (1993). This paper
reclassi® es the total manufacturing cost into four categories namely, productivity
cost, quality cost, ¯ exibility cost, and inventory cost. For each classi® ed cost element,
the cost function for a unit of product for each signi® cant process in the manufac-
turing operation is derived for a set of alternatives for that particular process. As a
solution procedure a dynamic programming method is used to obtain the optimal
design decision which minimizes total product costs.
The costing concept employed is very similar to ABC. The most signi® cant aspect
of the work is the use of an optimization procedure to derive the solution to the
design problem.
An objected-orient approach to activity based cost estimation which is capable of
supporting the engineer in the early phases of design was presented in Fischer et al.
(1994 ). This method combines a product model and a resource model, which are
both based on STEP structures. In the ® rst step of the design process the engineer
® xes the main attributes of the new product. The system checks all products in the
knowledge database for objects like form-features and components with similar
attributes. These objects are matched to those used for the new product to predict
activities and the resulting production costs. Through the combined consideration of
the product characteristics, the target costs and the available resources, a product
structure with optimum production processes is deduced (Fischer et al. 1994).
Ong (1995 ) presents the development of an activity-based cost estimating system
to help designers in estimating the manufacturing cost of a printed circuit board
assembly at the early concept stage of design. Activities are identi® ed, quanti® ed and
the cost allocated based on the amount of activities used by the printed circuit board
(PCB). A spreadsheet PCB tool is used for the calculation of the manufacturing cost
based on the input data, cost build-up table and activity charts. The data required as
input include the batch size, life volume, number of boards per panel, length dimen-
sion of the panel and unskilled and skilled workers’ rates. Though the author claims
the model is meant to be used at the conceptual phase of design, the data needed for
the evaluation will most probably not be available till the preliminary design stage.
As part of a Design for Manufacture research program at the University of
Rhode Island a number of computer based models for estimating the cost of fabri-
cating parts have been developed (Dewhurst 1988). The objective of these studies was
to provide methods with which the designer or design team can quickly obtain
information on costs before detailed design has taken place (Boothroyd 1994).
Studies have been completed for machined parts (Dewhurst and Boothroyd 1988,
Boothroyd and Rodovanovic 1989), injection-moulded parts (Dewhurst 1988,
Dewhurst and Boothroyd 1988), die-cast parts (Dewhurst and Blum 1989) and
sheet-metal stampings (Zenger and Dewhurst 1988).
Models for the estimation of the cost of fabrication have also been developed by
others. Knight (1991) has developed a methodology for determining the cost for
processing parts manufactured by sintering from powder metals, Dixon and Poli
(1995 ) have developed methodologies for injection moulding, stamping and die cast-
ing and Mahmoud and Pugh (1979) also developed models for turned parts. Most of
these models for early cost estimating result from a detailed study of each process to
identify the main cost drivers. From these studies, simpli® ed but realistic cost esti-
mating procedures are developed which can then be used to quantify the e ects of
early design decision on manufacturing costs (Knight 1991).
In a series of papers Boothroyd and Dewhurst (Boothroyd and Dewhurst
1983a, b; Dewhurst and Boothroyd 1984a, b) presented models for calculating the
cost of assembly of products using robots, automatic machines, and manually. These
have been formalized into computer programs. The programs can show whether a
particular product is likely to cost less if assembled manually, automatically or by a

robot. The cost in all cases is based on determining the time needed to assemble the
products by the particular method and a cost rate plus the cost of the equipment
used.
The concept of service model analysis (SMA ) as an evaluation method of design
for serviceability was developed by Gershenson and Ishii (1993) . Its use in design
evaluation is discussed in Marks et al. (1993 ) and Ishii (1995). SMA focuses on any
form of service needs in estimating life-cycle ownership cost. A computer software
infers the labour operations necessary for various service operations, identi® es cost
drivers and indicates areas for improvement. Service modes include regular main-
tenance, repair of failed components of systems, or service for undesirable side
e ects. The current implementation utilizes a semantic network representation
known as `linker’ for the design layout. The computer software can use the linker
to infer the sequence of labour steps needed to perform each mode of service. The
labour step cost (LSC) equation is of the form.
L SC = ( tl + pl ) ´ clr + ( cp + pp )
where
tl labour time,
pl labour time penalty,
cir labour rate,
cp part or material cost,
pp part or material cost penalty.
The labour time is the sum of handling time (e.g. fastening and unfastening time). A
labour time penalty is added to account for special tooling requirements, special
technician training requirements, fastener clearance and tool orientation. Part re-
placement adds to the part cost and assesses a penalty based on part availability.
Given a set of cost driving service modes, and their frequencies of occurrence, the
program can compute the total life cycle service costs using the following equation
[å ( )]
n m m
L CSC = å k= 1 j= 1
f Rj ,k å j= 1
L SCi, j
where
f Rj,k frequency of labour operation j associated with service mode phenomenon
k,
L SCi, j labour step cost i associated with labour operation j,
l number of labour steps associated with labour operation j,
m number of labour operations associated with service mode phenomenon k,
n number of service mode phenomenon being evaluated.
While the semantic representation of the design layout is very good, the model
presented does not deal with stochastic failures and also it does not incorporate
failure mode and e ect analysis. These are aspects of serviceability that cannot be
ignored in any cost model that is intended for use in the ownership phase of the
product.
The use of the linker representation for calculating recycling cost is presented in
Marks et al. (1993 ), Burke et al. (1992) , Ishii et al. (1994) and Di Marco et al. (1994 ).
Just as in SMA, the linker program is used to determine the various labour steps
needed to recycle the product. System disassembly cost is a key factor in the analysis
for product retirement. The cost can be determined from the disassembly time if we
know the labour rate. The total disassembly time for a system is calculated by
summing the individual disassembly time for each element in the system
l m n
Ds = å i= 1
Ci + å j= 0
( f n ´ F) j + å k= 0
( pn ´ P) k
where
Ds system disassembly cost,
Ci time to remove component,
Fj time to remove fastener,
Pk time to remove or undo process,
f nj number of fasteners associated with one link,

pn number of process points associated with one link,
l total number of components in system,
m total number of links with fasteners,
n total number of links with fastening processes.
Technical cost modelling (TCM) is presented in Automotive Engineering (1993 ).
This is an approach to determine the best ways to recover materials from automo-
biles. The TCM approach has been implemented using a spreadsheet. The model
tracks materials ¯ ow through the various recycling stages beginning with the
scrapped vehicle to determine the net cost of recycling. TCM focuses only on
direct costs. However, as stated in Shields and Young (1991) `the signi® cant oppor-
tunities for cost reduction occur not with direct labour but with indirect labour.’
Navinchandra (1993) has developed a CAD tool, ReStar, for disassembly
sequence optimization and environmental recovery analysis. It takes as input a
description of the product and generates a disassembly plan. The program currently
has disassembly times and costs in its database. It has some information on energy
and emissions but according to the author, this part of ReStar’ s databases are not
well developed due to a lack of reliable information sources. For each disassembly
operation that it performs, ReStar keeps track of time and costs. As parts are
disassembled they bring in revenues. By keeping track of total costs, ReStar is
able to ® nd the optimal path and the points of maximum payback or break even
point. ReStar can also be used to assess the impact of design changes by conducting
`what if ’ scenarios studies. The problem of determining the best recycling options is
treated as a travelling salesman problem only in this instance all the states need not
be visited. The underlying optimization algorithm is based on the best ® rst search
paradigm, with lookahead enhancements to improve e ciency and currently uses a
multi-objective version of the A* algorithm (Navinchandra 1993).
Emblemsvag and Bras (1994) illustrated how an ABC based deterministic cost
model can be used in the decision making process to obtain an overall cost e cient
design. The recycling of the product at the end of its useful life is what is considered
here. The recycling phase is broken down into a hierarchy of activities. Then for a
particular design, a determination is made of the activities that it will require and the
cost calculated. Though this model is supposed to help designers make decisions, the
model as presented in this paper can only be used to make decisions at the product
level.
Bras and Emblemsvag (1995) extend their work in Emblemsvag and Bras (1994)
further to include uncertainties. The crux in developing an ABC model is to identify
the activities that will be present in the life-cycle of a product and assign reliable cost
drivers and associated consumption intensities to the activities. Uncertainty distribu-
tions are assigned to the numbers used in the calculations, representing the inherent
uncertainty in the model. The e ect of the uncertainty on the cost model behaviour
are found by employing a numerical simulation techniqueÐ the Monte Carlo simu-
lation technique. The additional use of detailed process action charts and sensitivity
charts allows the in¯ uence of the uncertainty to be traced through the cost model to
speci® c product and process parameters.
All the models described so far treat the product at the part level. Models that
treat products at the system level usually use parametric costing techniques. These
models abound in the literature (a survey of the literature can be found in Gupta and
Chow (1985 )) but they o er little theoretical diversity and tend to be very restricted
to the application for which they were developed. Below we discuss just a few such
models.
An optimum life cycle cost (OLCC) technique for studying the in¯ uence of
functional elements on the total LCC and their interaction is discussed in Muglia
et al. (1974 ). These elements include reliability, maintainability, availability, data,
logistics, spares training test equipment, tooling, testing and evaluation, cost, time,
labour and others (Muglia et al. (1974)). The LCC is modelled as a non-linear
interactive function of the functional elements. The OLCC technique uses the
LCC model developed and basically optimizes parameters or determines the e ects
of parameters. The model encompasses the research and development, production
and operation phase cost considerations (Muglia et al. (1974 )). The model can con-
sider such things as learning curves, risk factors, cost of money over time, reliability
and maintainability improvement over time, cost of living index over time, in¯ ation
escalation, terminal value, cash ¯ ow, and standard decision options (i.e. make or
buy, lease, or purchase).
A computerized LCC model developed at the General Electric Company is
described in Shoemaker (1980, 1981). This model can be used not only to make
trade studies, but also to examine detail tradeo s among the materials and shapes
used in the design of engine components. The LCC model calculates the life cycle
cost of the research development test and evaluation ( RDT&E) and the operations
and support (O&S) of an engine program. The O&S portion is calculated through an
analytical routine called the operation and support cost analysis program (OSCAP).
OSCAP is a deterministic mathematical model which calculates the O&S costs of
each engine using an accounting type LCC model and was designed primarily to
evaluate engine design (Shoemaker 1980, 1981). It can also be used either to compare
the O&S LCC impact of various design change alternatives, or to evaluate an engine
contribution to the complete maintenance and logistic LCC in a total weapons
program (Shoemaker 1980, 1981). The LCC model also considers the e ects of
changes in mission severity on LCC (Shoemaker 1980, 1981). The operating severity
analysis program (OPSEV) predicts the relative e ect of various engine operating
pro® les on the failure rates and hence O&S cost of the major components of an
engine.
The methodology presented in Johnson (1990) consists of an LCC model com-
posed of elements to calculate RDT&E ( Research, Development, Testing and
Evaluation ) cost production cost, DOC (Direct operation cost), IOC (Indirect oper-
ating cost) and an existing conceptual design and analysis code, the ¯ ight optimiza-
tion systems (FLOPS).
FLOPS is a multidisciplinary system of computer programs for the conceptual
and preliminary design and evaluation of advanced aircraf t concepts. FLOPS may
be used to analyse a point design, parametrically vary certain design variables, or
optimize a con® guration with respect to design variables using nonlinear program-
ming techniques. The addition of the LCC module to the conceptual design system
allows cost to become an additional optimization parameter, making it possible to
specify life cycle cost, acquisition cost, direct operating cost, total operating cost, or
return on investment as the parameter to be optimized.
This paper did not discuss the development of any particular cost model but
rather discusses the use of models already being used by other ® rms for life cycle cost
analysis in aircraf t design. A matter of concern is the accuracy of the cost estimates.
As indicated by the author `the cost models chosen for the LCC module may pro-
duce questionable absolute cost estimates; however, the model chosen permits alter-
natives to be treated consistently so that relative comparisons are valid’.
A study to determine both a minimum weight candidate lunar aerobrake struc-
ture and the design parameters which have the most signi® cant e ect on weight,
structural integrity, and cost is presented in Unal et al. (1993 ). This parameter
optimization and sensitivity study is performed by employing parametric cost analy-
sis in conjunction with ® nite element analysis and the Taguchi design method. Finite
element analysis and parametric cost analysis are applied to analyse a series of
experimental aerobrake con® gurations selected by the Taguchi method for strength
and cost respectively (Unal et al. 1993). Cost estimates for the di erent aerobrake
design con® gurations are developed primarily using parametric techniques. Overall
results suggest that the combination of the Taguchi method and parametric cost
estimating is a powerful approach which can o er simultaneous improvements in
performance, cost, and engineering productivity (Unal et al. 1993).
A di erent approach to design parameter optimization is the treatment of cost
equations as continuous and di erentiable functions. An example of this is presented
in Govil (1984). Analytical models for life cycle cost (de® ned in this case as the sum
of the acquisition cost (AC) and the logistic support cost (LSC) as a function of
reliability are presented. Five new models of LCC are developed based on the
assumption that LCC vs a reliability curve exhibits the following features:
(1) Acquisition cost is a monotonic increasing function of reliability

(2) Logistic support is a monotonically decreasing function of reliability
(3) Life cycle cost exhibits a minimum L CCm , at a certain reliability value Rm
(4) AC dominates if reliability R > Rm , while L SC dominates if R < Rm .
To obtain minimum life cycle cost, the functions for the curves are di erentiated
with respect to R and put equal to zero. The resulting equation is solved numerically
to obtain the reliability Rm coresponding to L CCm . This does not indicate how to
select design parameters to achieve the required reliability though.
5. S ummary
Life cycle engineering as an approach to the development of a product has been
recognized as an e ective way to compete in the current global market. One aspect of
life cycle engineering is LCC analysis. The growing demand on producers to develop
products that are inexpensive to acquire, use, and dispose of has necessitated that the
life cycle cost of products be considered during the design of the product.
For designers, estimating the LCC of a proposed product during its development
phase is required for a number of reasons including:
(1) Determining the most cost e cient design amongst a set of alternatives,
(2) Determining the cost of a design for budgetary purposes.
(3) Identifying cost drivers for design changes and optimization.
In this regard, LCC analysis should not be seen as an approach for determining the
cost of the system per se but as an aid to design decision making. The use of life cycle
cost analysis should therefore be restricted to the cost that we can control.
Though ® ner distinctions can be made, estimating techniques can be broadly

classi® ed as parametric, analogous, and detailed models. Parametric models are
the easiest to use but do not o er much accuracy. Detailed models o er greater
accuracy but tend to be cumbersome to use. A number of parametric models are
commercially available and are used predominantly in the defence and aero indus-
tries. Inaccuracies in cost estimates can greatly increase the cost of a product.
Activity-based costing (ABC) as an accounting procedure for the allocation of
cost has been proposed as a way to improve the accuracy of cost estimates.
Although ABC o ers a signi® cant advantage over traditional accounting methodol-
ogies in the allocation of cost to products, we should not see the problem of LCC
analysis as a question of just which particular accounting procedure to adopt.
Cost estimates are decisions about what costs will be in the future. The accuracy
of the estimate is inversely proportional to the span of time between the estimate and
the event. Like all decisions, cost estimates can be classi® ed as those made under
certainty, risk, or uncertainty. One issue that has been largely ignored in cost esti-
mating models is uncertainties in the parameters. As cost is uncertain in many
aspects, it is imperative that any life cycle model incorporate the treatment of uncer-
tainties.
It has been recognized that the design process needs cost models that: (1) take
into account the complete life-cycle of products, (2) can be used at the very early
stages of design and (3) can provide information to designers in a timely manner and
in a form that can be understood and used. Some e orts have been made toward
providing the designer with cost information during the design process. While most
of these authors recognize the need for a LCC model, the models developed are
restricted to speci® c processes, simple operations, or one phase of the life cycle. A
large number of these e orts have been for the production and construction phase of
the product life cycle. On the other hand, the models that treat the product at the
system level seldom consider the end-of-life of the product and more importantly,
these models tend to be more useful for procedure purposes than for design. At best
these models can be used to set cost targets at the conceptual design stage.
It is apparent that there is the need to develop a model and a framework that will
consider all aspects of the product life cycle. This model should be able to o er
engineers information that can readily provide estimates with minimal inputs,
include the treatment of uncertainties, identify cost drivers and o er optimal
design solutions.
Acknowledg ements
The authors wish to thank the Natural Sciences and Engineering Research
Council of Canada (NSERC) and Atomic Energy Canada Ltd (AECL) for providing
® nancial support for this research through the Industrial Research Chair Program.
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Product life cycle cost

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Product life cycle cost analysis: state of the art review

Y. ASIEDU² and P. GU³ *

Received March 1997.

2. Life cycle approa ch to design

Figure 1. Parallel life cycles in product development.

2.1. Cost issues in life cycle design

Figure 2. Life-cycle stages and costs (adapted from Atling 1993).

2.1.1. Production and construction cost

Figure 3. Cost breakdown structure (Fabrycky and Blanchard 1991).

2.1.2. Operation and support cost

 Localization: determining the location of a failure to the extent possible with-

 Alignment: performing an alignment, minimum tests, and/or adjustment made

2.2.3. Retirement and disposal cost

have to be developed by companies who want to be able to compete (Weule 1993).

(2) Remanufacturing: through certain refurbishing or restoration processes,

3. Life cycle cost analysis

(3) Alternative equipment design con® gurationsÐ packaging schemes, diag-

support levels, maintenance functions and talk, preventive vs corrective,

3.1. Cost estimating approaches

3.1.1. Parametric models

3.1.2. Analogous models

3.1.3. Detailed models

(1) Determining or collecting the basic standard times;

3.2. Accuracy in cost estimating

Figure 6. The Freiman curve (Daschbach and Apgar 1988).

3.4. Certainty, risk, uncertainty, and dependency

LCC models are essentially predictive in nature and characterize a stochastic

4. A review of cost models

An investigation of the potential application of neural networks to cost estimat-

particular product is likely to cost less if assembled manually, automatically or by a

f nj number of fasteners associated with one link,

(1) Acquisition cost is a monotonic increasing function of reliability

Though ® ner distinctions can be made, estimating techniques can be broadly

based costing. Accounting Horizons, 8 (3), 83± 105.

De la Garz a , J. M., and R ouhana, K. G., 1995, Neural networks vs parameter-based

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Localization: determining the location of a failure to the extent possible with-

Alignment: performing an alignment, minimum tests, and/or adjustment made