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CMA Final · Strategic Cost Management · Asset Life Cycle Costing

Which of the following is treated as an acquisition-phase cost, rather than an operating-phase cost, when an asset's life cycle cost is built up for a machine purchased by Sundaram Engineering Ltd?

Site preparation and foundation cost is an acquisition-phase cost because it is incurred to get the asset ready for use. Lubricants, power, overhauls and operator wages arise after commissioning and are operating or maintenance costs in the life cycle of the asset.

  1. AAnnual lubricants and power consumed by the machine
  2. BPre-installation site preparation and foundation costCorrect
  3. COverhaul expenditure incurred in the sixth year
  4. DOperator wages during production runs

Explanation

Acquisition cost covers everything spent to get the asset ready for use, such as purchase price, freight, site preparation, foundation and installation. Lubricants, power, overhauls and operator wages recur after commissioning and belong to operation and maintenance cost.

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