Comparing Life Cycle Costing and Parametric Control

Compare and contrast life cycle costing and parametric cost control, highlighting their distinct features and applications. Question 12Answer a. Life cycle costing focuses on short-term costs, while parametric cost control is concerned with long-term costs. b. Parametric cost control is primarily used in manufacturing, whereas life cycle costing is applicable to service industries. c. Life cycle costing considers costs over a product's entire life, while parametric cost control relies on specific cost parameters. d. Parametric cost control is more suitable for small businesses, whereas life cycle costing is tailored for large corporations.

To compare and contrast life cycle costing and parametric cost control, let's analyze the distinct features and applications of each approach based on the options provided:

Life Cycle Costing (LCC):

• Definition: Life cycle costing is a method that considers all costs associated with a product or project over its entire life span, from initial development through to disposal. This includes acquisition costs, operation and maintenance costs, and end-of-life costs.
• Application: LCC is widely used in various industries, including manufacturing, construction, and service sectors, to make informed decisions about investments and to evaluate the total cost of ownership.

Parametric Cost Control:

• Definition: Parametric cost control involves using statistical relationships between historical data and other variables to estimate costs. It relies on parameters (like cost per unit, labor rates, etc.) to predict future costs based on established metrics.
• Application: This method is often used in project management and manufacturing to control costs and improve budgeting accuracy by leveraging historical data and trends.

Now, let's evaluate the provided options:

a. Life cycle costing focuses on short-term costs, while parametric cost control is concerned with long-term costs.

• Analysis: This statement is incorrect. Life cycle costing is inherently focused on long-term costs over the entire life of a product, while parametric cost control can be used for both short-term and long-term cost estimation.

b. Parametric cost control is primarily used in manufacturing, whereas life cycle costing is applicable to service industries.

• Analysis: This statement is misleading. While parametric cost control is indeed used in manufacturing, it is also applicable in various other sectors, including construction and project management. Life cycle costing is not limited to service industries; it is relevant across multiple sectors.

c. Life cycle costing considers costs over a product's entire life, while parametric cost control relies on specific cost parameters.

• Analysis: This statement is accurate. Life cycle costing encompasses all costs throughout the product's life cycle, while parametric cost control uses specific parameters to estimate and control costs.

d. Parametric cost control is more suitable for small businesses, whereas life cycle costing is tailored for large corporations.

• Analysis: This statement is not entirely accurate. Both methods can be applied to businesses of any size. Parametric cost control can be beneficial for small businesses looking to manage costs effectively, while life cycle costing can also be valuable for small projects or products.

Conclusion: The most accurate comparison is found in option c, which highlights the fundamental differences between life cycle costing and parametric cost control in terms of their focus on costs over time and reliance on specific parameters.