Engineering Economic Analysis

36 ENGINEERINGCOSTS AND COST ESTIMATING

Book costsdo not require the transaction of dollars "from one pocket to another."

Rather, book costs are cost effects from past decisions that are recorded "in the books"

(accounting books) of a firm. In one common book cost, asset depreciation (which we

discuss in Chapter 11), the expense paid for a particular business asset is "written off" on

a company's accounting sy'stem over a number of periods. Book costs do not ordinarily

represent cash flows and thus are not included in engineering economic analysis. One

exception to this is the impact of asset depreciation on tax payments-which are cash flows

and are included in after-tax analyses.

Life-Cycle Costs

The products, goods, and services designed by engineers all progress through a life cycle

very much like the human life cycle. People are conceived, go through a growth phase,

reach their peak during maturity, and then gradually decline and expire. The same general

pattern holds for products, goods, and services. As with humans, the duration of the dif-

ferent phases, the height of the peak at maturity, and the time of the onset of decline and

termination all vary depending on the individual product, good, or service. Figure 2-3

illustrates the typical phases that a product, good or service progresses through over its life

cycle.

Life-cycle costing refers to the concept of designing products, goods, and services with

a full and explicit recognition of the associated costs over the various phases of their life

cycles. Two key concepts in life-cycle costing are that the later design changes are made,

the higher the costs, and that decisions made early in the life cycle tend to "lock in" costs

that are incurred later. Figure 2-4 illustrates how costs are committed early in the product

FIGURE 2-3 Typical life cycle for products, goods and services.

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Beginning Time ) End

Needs ."'. ."'-

COJ;lceptual Detailed QperalioniJ,l Decline and

AS$eSsment or r>e$igJ:lEhase or U§eEhase Retirement

and PreXimjI)ary Constnicti!:m Phase

Justification DeSign Ehase Phase

Phe ..,,-

Requirements Impact Analysis Allocation Product, Goods Operational Use Declining Use

of Resources & Services Built

Overall Proof of Detailed All Supporting Use by Ultimate Phase Out

Feasibility Concept Specifications Facilities Built Customer

Conceptual Prototype/ Component Operational Use Maintenance Retirement

Design Planning Breadboard and Supplier 'Planning and Support

Selection

Development Production or Processes, Responsible

and Testing Construction Materials and Disposal

Phase Methods Use

Detailed Design Decline and

Planning Retirement

Planning