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Life-Cycle Costing: Using Activity-Based Costing and Monte Carlo Methods to Manage Future Costs and Risks


Manage costs before they occur

"Traditional cost cutting has always had a backward focus and created lots of negative reactions–both rational and irrational. In his new book, Jan Emblemsvag introduces a new forward looking life-cycle approach to cost management. Employing foresight instead of hindsight puts the focus on processes, uncertainty and risks, and future value creation.

"The author's strong side–besides having a good holistic concept–is the ability to express himself accurately and clearly on very complicated and sophisticated theory. Managers, consultants, and others with interest in cost management will be enlightened and inspired by the book–and no doubt find it of great help in applying the methods and processes that are presented.

"The idea of turning uncertainty into an asset for managers is quite unique. Making budgeting less data-oriented and more risk-oriented is another good idea. The next step now is to make operative approaches and apply the theory in practical situations!"
–John-Erik Stenberg
Considium Consulting Group AS

"This book skillfully combines the ideas of life-cycle costing and activity-based costing to come up with an approach to effectively manage costs in an uncertain environment."
–Dr. Arnold Schneider
Professor of Accounting
Georgia Institute of Technology

Life-Cycle Costing (LCC), a cost projection method typically associated with engineering, allows for the accurate prediction of the total costs a product will incur throughout its life-cycle. Meshing this technique with activity-based costing, risk management, and Monte Carlo analytical methods, Jan Emblemsvåg offers a broad range of businesses a new, more effective approach to cost management in Life-Cycle Costing.

By introducing uncertainty into its models, "Activity-Based LCC" offers managers the clarity of hindsight before costs are actually incurred. Among other features, Life-Cycle Costing includes:

  • Three case studies that demonstrate how Activity-Based LCC affords superior cost management
  • A step-by-step guide to LCC methodology
  • Definitions of key terms
  • A discussion of activity-based costing and risk management fundamentals
  • An appendix with examples of Monte Carlo methods

Life-Cycle Costing provides controllers and cost managers an insider's look at the next generation of cost management techniques.

JAN EMBLEMSVÅG is a management consultant with Det Norske Veritas Consulting, where he works on cost management, risk management, and business development projects. Formerly, he was a partner with Considium Consulting Group AS. He is coauthor, with Bert A. Bras, of Activity-Based Cost and Environmental Management: A Different Approach to the ISO 14000 Compliance.


1. Introduction.

What Does It Cost?

The Role of Life-Cycle Costing.

Why Activity-Based Life-Cycle Costing?


2. Basics of Life-Cycle Costing.

What Is a Life Cycle?

What Is a Cost?

Four Ways of LCC.


3. Uncertainty Analysis and Risk Management.

What are Risk and Uncertainty?

Uncertainty, Risk, and Utility.

Common Ways of Analyzing Risk and Uncertainty.

How Belief Sheds Light on Risk and Uncertainty.

Reduce Risk by Introducing Uncertainty: How Monte Carlo Methods Work.

Traditional Risk Management.


4. Activity-Based Costing.

Motivating Example.

Activity-Based Costing.

ABC Example and Case Study.

From the Trenches.


5. Activity-Based Life-Cycle Costing.

Step 1: Define the Scope of the Model and the Corresponding Cost Objects.

Step 2: Obtain and Clean Bill of Materials for All Cost Objects.

Step 3: Identify and Quantify the Resources.

Step 4: Create an Activity Hierarchy and Network.

Step 5: Identify and Quantify Resource Drivers, Activity Drivers, and Their Intensities.

Step 6: Identify the Relationships between Activity Drivers and Design Changes.

Step 7: Model the Uncertainty.

Step 8: Estimate the Bill of Activities.

Step 9: Estimate the Cost of Cost Objects and Their Performance Measures.

Step 10: Perform Monte Carlo Simulations and Relevant Analyses.

Further Explanation Regarding Some Steps.


6. Case Study: Life-Cycle Costing and Tire Disposal.

What the Decision Is About.

Traditional LCC Implementation.

Activity-Based LCC Implementation.





7. Activity-Based Life-Cycle Costing for Platform Supply Vessels.

Operating a Platform Supply Vessel.

Problem Statement and System Boundaries.

Information Sources.

Activity-Based LCC Model Implementation and Results.

Identifying the Major Operational Risks.



8. Activity-Based Life-Cycle Costing at WagonHo!

WagonHo!’s New Strategy and Business Idea.

Developing an Activity-Based LCC Model.

Results and How to Use Them.



9. From Hindsight to Foresight.

Activity-Based LCC Revisited.

Ideas for the Future.

Some Thoughts at the End.


Appendix A Monte Carlo Simulation Example.

Problem Definition.

Hypotheses to Be Tested.

Results and Discussion.

Appendix B SFI Group System.