The Life Cycle Costing or Life Cycle Cost Analysis is one of the environmental accounting methodologies capable of monitoring the efforts and results of business activities from an economic perspective. According to some definitions and interpretations, it translates into the measurement of all internal and external costs to the economic entity (the company) associated with the entire life cycle of a product, process, or activity. Generally, external costs refer to those costs that do not directly affect the economic entity itself, but rather the society and the surrounding environment. The LCC methodology offers the opportunity to expand the scope of traditional accounting, providing companies with significant opportunities for cultural and social growth: the correct integration of environmental costs within the framework of other economic burdens of a product and/or process constitutes a necessary step for companies that want to remain competitive in the global market.
Cost classification
Life Cycle Costing, presenting itself as a methodology for economic-environmental investigation, aims at identifying and quantifying all economic costs associated with the life cycle of the process or activity, including also those due to the environmental impact of the examined cycle. The choice of clear and correct terminology within LCC is essential for the objectives of improving environmental performance that various external parties (suppliers, customers, shareholders, Public Administration, etc.) are interested in as stakeholders. Some concepts of the method can be better understood through an illustration by the U.S. Environmental Protection Agency (EPA - Environmental Protection Agency) with the aim of providing an approximate classification of all costs related to the relationship between the company and the environment, of which I will provide a reworking below.
In category C fall all those costs that are traditionally identified and measured within the company's system by analytical accounting, aimed at management control, and by general accounting, aimed at the preparation of the financial statements intended as a document of economic-financial reporting. Category B can be defined as the domain of all internal costs of the company, including therefore also those hidden and less tangible, which, being less easily measurable and quantifiable, are difficult to identify in general accounting.
These costs can be hidden in expenditure items that are not specifically attributable to environmental aspects, or may arise from potential situations. Among the potentially hidden costs are those related to preparation for production activities (environmental impact assessments, permits, etc.), costs necessary to comply with current legislation (insurance, emission control, etc.), voluntary costs (environmental audits, reporting, etc.), or productivity losses related to workplace risks (serious accidents, damage to the company's image, etc.). The sum of B and C generates the total costs of the company. Total costs can therefore be defined as all costs for which a company is responsible in a specific period of time and in light of prevailing or foreseeable market regulation conditions (Bartolomeo, 1997 - Business Environmental Accounting).
In zone A, all external costs that the price mechanism and market rules fail to attribute to the company are finally included. Environmental impacts, sometimes combined with other negative effects in the social sphere (unemployment, etc.), fall distinctly into this category, which is defined as "negative externalities".
Next lesson: Evaluation of externalities
