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SEMINAR IN MANAGEMENT

ACCOUNTING
(MAF 651)
SEMINAR 1: LIFE CYCLE COSTING

CLASS : AC220 8H
PREPARED FOR: ASSOC. PROF. DR NORZIATON
ISMAIL KHAN
PREPARED BY :
No. Name Student ID
1 Nurasmira binti Mohd Puzi 2017638992
2 Humaira Syuhada binti Ithnin 2017638856
3 Zarith Sofia binti Nasuha 2017649058
4 Widad Hayati binti Abdul Ghani 2017639158
5 Nur Izzati binti Ariffin 2017649076
TABLE OF CONTENT
No. Particular Page
Number
1.0 Life Cycle Costing (LCC)
1
1.1. Definition
1
1.2. Purpose of LCC
1
1.3. Important aspects to LCC
1-2
1.4. Characteristics of LCC
2-4
1.5. Phases in LCC
5-6
1.6. Trade-off
6
1.7. Minimized the time to market
6
1.8. Minimized breakeven time

2.0 Product Life Cycle (PLC) 6-8

3.0 Advantages and Disadvantages of LCC 8-9

4.0 Application of LCC 9

5.0 References 10
1.0 LIFE CYCLE COSTING
1.1 DEFINITION LIFE CYCLE COSTING
According to Langfield-Smith in Management Accounting book the 7th edition, a life
cycle costing is a cost management approach where cost is accumulated and
managed over a product’s life cycle. This approach is actually assisting management to
understand the cost consequence of developing and making a product and at the same time
we can identify areas in which cost reduction efforts are likely to be more effectives.

1.2 PURPOSES LIFE CYCLE COSTING


Purposes life cycle costing is to assists management to smartly manage total cost
throughout product’s life cycle. Life cycle costing is concerned with the assessment of the
total cost associated with a project during its operating life. In fact, such costs represent the
total cost estimated to be incurred in the design, development and execution of a project
throughout its anticipated useful life span. Thus, this will help management to determine the
sum of all costs of ownership of a system during its active life.
Next, to consider the cost throughout a project’s whole life rather than just initial
capital cost. If they only consider the initial, short-term cost, they won’t know if the asset will
benefit their business financially in the long run. By using life cycle costing, they can more
accurately predict if the asset’s return on investment (ROI) is worth the expense throughout
a project’s whole life.
Last purpose life cycle costing is to identify areas in which cost reduction efforts are
likely to more effective. It helps management to understand the cost consequences of
developing and making a product and to identify areas in which cost reduction
efforts are likely to be most effective. Very often, it will have certain stage that take high
cost in the process of life cycle costing. Therefore, it is important to focus on these costs
before the product enters the market.

1.3 IMPORTANT ASPECTS TO LIFE CYCLE COSTING


There are two important aspects to life cycle costing. First is focus on the product
cost. Product cost refers to the costs incurred to create a product. These costs include
direct labor, direct materials, consumable production supplies, and factory overhead.
Product cost can also be considered the cost of the labor required to deliver a service to a
customer. In the latter case, product cost should include all costs related to a service, such
as compensation, payroll taxes, and employee benefits.

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Second important aspect to life cycle costing is the inclusion of all upstream and
downstream cost. Upstream cost is a cost when we start the production processes that
consist of research & development cost, design cost and supplier cost. Meanwhile,
downstream cost is the cost that management takes on after the finished product is ready
for delivery. Downstream cost consists of marketing cost, distribution cost and customer
service cost.

1.4 CHARACTERISTICS OF LIFE CYCLE COSTING


The characteristics of Life Cycle Costing comprise:
 Tracing cost and revenue over several calendar periods.
 Each phase poses different threat and opportunities that may require different
strategies actions.
 Traces research and design and development costs and total magnitude of these
costs for each individual product and compared with product revenue.
 May be extended by finding new uses or by increasing the consumption of the
present users.

1.5 LIFE CYCLE COSTS GRAPH

The diagram shows that by the end of the design phase approximately 65% of costs are
committed. For example, the design will largely dictate material, labor and machine costs.
The company can try to haggle with suppliers over the cost of components but if, for
example, the design specifies 10 units of a certain component, negotiating with suppliers is
likely to have only a small overall effect on costs. A bigger cost decrease would be obtained
if the design had specified only eight units of the component. The design phase locks the
company in to most future costs and it this phase which gives the company its greatest
opportunities to reduce those costs.

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In this diagram, there are two different costs which are costs committed and costs
incurred. Cost committed is a cost that has not been incurred, but will be incurred in the
future on the basis of a decision already made. Example costs committed are asset
acquisition and research and development. Costs incurred is cost that happens when a
resource is used or given up. It is arising when a resource is sacrificed or forgone to meet
specific objective. The actual cost of product is built up mostly in the growth stage and
matured stage. As example the cost incurred are direct cost, indirect cost, production cost,
operating expenses that are incurred for running the business operations of the company.

1.6 PHASES IN LIFE CYCLE COSTING


1) Product planning & concept design phase
Planning have short and long-term plan sufficient for the company. Cost, activities,
people and all aspect that related with the product to make sure that there are no
problems during the process. Decision making and planning in the first step are
importance in making the overall of process of product is effective and not having any
problems and complications. The first phase of a product’s life encompasses activities
such as preliminary design, detail design and prototyping, testing, as well as supporting
functions such as data maintenance and project management.
Prototype Manufacture is a limited quantity of the product will be produced from the
sketches. Such experiments will be used for the production of the drug. Testing and
modifying in order to satisfy the specifications after the initial test. Development is taking
place during this time of testing and transition. When a product is made for the first time,
it never meets the specification specifications and improvements have to be made
before it meets the requirements.

2) Design & Development phase


Conduct the design and development in producing the products. It is to ensure that
the product produce can be competing in market and give more profit to the company.
Cost in making design for new product where design cost is incurred. During this phase,
usually cost incurred is for research, development, designing, and tooling.
It involves a market research which it will decide what product the consumer needs,
how much he is willing to pay for it and how much he is going to purchase. Design
means proper drawings and process schedules need to be established. Tooling up for
production can involve building a production line; building jigs, purchasing the tools and
equipment required, involving a very large initial investment.

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Key objectives at this stage include optimize the relationship between materials,
parts, and manufacturing processes, minimize costs, focus design efforts on market-
driven variables for quality and cost of ownership, link product development with
customer desires and to achieving a sustainable competitive advantage, link the product
development process so that it assures product quality, and estimate the cost prior to
implementation.
3) Production phase

Product architecture costs occurred during this phase. Product’s cost depends on
the complexity of manufacturing and assembly process. Complex products requiring
complex manufacturing processes result in higher costs compared to simpler parts with
simpler process.
For example, automobile rear lamp production required higher cost compared to the
garment manufacturing due to the complexity to assemble the component & high cost of
component. Small production volume results in higher development cost per unit
compared to large production volume because these costs can be spread over a large
production volume. The manufacturing of the product requires the procurement of raw
materials and parts, the use of labor, and the cost of production of the product.
The objective at this phase is to pursue cost reductions relentlessly at every stage of
manufacturing to close any remaining gaps between targeted and actual profits. A useful
tool for this cost reduction effort is activity-based costing (ABC) or activity-based
management (ABM). ABC and ABM can be used to increase the understanding of cost
items such as manufacturing overhead, marketing, distribution, service and support and
general business overhead.

4) Distribution & Customer support

Distribution costs usually defined as the costs incurred to deliver the product from
the production unit to the end user. The distribution, transport, logistical, selling and
abandonment cost involved must be plan. Effective plans in this stage such as the
transports, promotions, marketing in promote the product in the market. Example costs
are marketing cost, delivery cost, warranty cost.
Customer support is the range of services you offer to help your customers get
the most out of your product and to resolve their problems. It is what we call customer
satisfaction. Once customer gives good feedback about the products, they will regularly
support it as long as the organization keeps maintaining their quality and cost.

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1.7 TRADE-OFF

PRE-PRODUCTION
Pre-production costs are the process of planning some elements on which involved in a
manufacturing of automobile, construction, movie, game, or other performance. The phases
involved are product planning and design or development which the early stage of life cycle
costing. Budget allocation has been determined in this phase and majority of life cycle
costing are allocated at the early stage.
PRODUCTION
Production or product costs refer to the costs incurred by a business from manufacturing
a product or providing a service. Production incurs both direct costs and indirect costs. The
phases involved are production phase and distribution and customer support.
TRADE-OFF
In economics, the term trade-off is often expressed as an opportunity cost, which is the
most preferred possible alternative. A trade-off involves a sacrifice that must be made to get
a certain product or experience. A person gives up the opportunity to buy 'good B,' because
they want to buy 'good A' instead.
In pre-production stage, the companies invested a huge amount to make sure their
products as per customer's needs and demands. The companies should invest more to get
the best market demand and produce what customers need; therefore, they need to fulfil
customer satisfaction without ignoring it.
While in production stage, the company’s products are accepted by the customer. They
already made a survey in order to get efficient result. The company can make an
advertisement in order to attract customer. There is some cost that incurred during this
stage such as advertisement cost. During advertisement, the organization will incur more
cost as they might advertise their product in a unique way so customer will know about their
products and did not hesitate to buy them. As a result, it will fulfill customer’s demand and
the organization gain regular customer. If the organization did not sacrifice now, they will
suffer later.
When designers try to save money at pre-production stage, the result is often a poor
design, calling for a change orders during construction and prototype development. These
changes are more costly than working out a better design would have been. However, when
the designers spent more in pre-production phase, companies spent more to get market
demand to fulfill what are the customers’ need thus it can reduce the costs incurred by the

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companies. During the production phase, no alteration need to be done because companies
already fulfilled what customers desired for. No changes should be made.
Hence, costs incurred in pre-production and production costs can be trade-off.
1.8 MINIMIZED THE TIME TO MARKET
For competitors, it is vital to get it to the market place as soon as possible. The life span
may not proportionally lengthen if the product’s launch is delayed and so sales may
permanently lose. This means that it is worthwhile incurring extra costs to keep the launch
on schedule or speed up the launch. Competitors aware each other to discover new
products coming to market, and they seek to develop products to keep ahead of each other.
When competition is minimal, the growth phase of a product's life provides producers the
chance to charge premium prices and invest heavily in awareness activities. The longer a
producer has before a rival product hits the market, the longer they're able to command a
price premium and entrench their product in the consumer's buying habits. The
management accountant should be aware of the competitive market for new products to
improve accuracy of whole-life profitability.
1.9 MINIMIZED BREKEVEN TIME
A short breakeven time is very important in keeping an organisation liquid. The sooner
the product is launched the quicker the research and development costs will be repaid,
providing the organisation with funds to develop further products. In life cycle costing, break
even occurs when revenue from the product has covered all the costs incurred to date
including design and development costs.

2.0 PRODUCT LIFE CYCLE

Time

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The figure above shows the stages in Product Life Cycle (PLC)

The product life cycle is broken into four stages: introduction, growth, maturity, and decline. This
concept is used by management and by marketing professionals as a factor in deciding when it
is appropriate to increase advertising, reduce prices, expand to new markets, or redesign
packaging.

PLC represents the sales and profit generated by product over a period.

Introduction Stage

In this stage, products are unfamiliar to consumers and market segments are not well
defined as product features are not clearly specified as well. The size of the market for the
product is small, which means sales are low, although they will be increasing. Usually at this
stage, the sales are low as it requires more time for consumer to know the presence of the
products. This stage of the cycle could be the most expensive for a company launching a new
product. This stage is about developing a market for the product and building product
awareness. Marketing costs are high at this stage, as it is necessary to reach out to potential
customers. On the other hand, the cost of things like research and development, consumer
testing, and the marketing needed to launch the product can be very high, especially if it’s a
competitive sector. Product pricing may be high to recover costs associated with the
development stage of the product life cycle, and funding for this stage is typically through
investors or lenders.
Growth Stage

The product has been accepted by customers, and companies are striving to increase
market share. The primary key to success is to build consumer preferences for specific brands.
During this stage, sales increases at an accelerating rate at shorter time taken than in maturity
stage because new consumers are trying the product and a growing proportion of satisfied
consumers are making repeat purchases. For innovative products there is limited competition at
this stage, so pricing can remain at a higher level. Both product demand and profits are
increasing, and marketing is aimed at a broad audience. Funding for this stage is generally still
through lenders, or through increasing sales revenue.
Maturity Stage

At the maturity stage, it is the longest time product in the market as the sales will be at peak
as the product reaches market saturation. Then sales will be low as the product reaches

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widespread acceptance. Markets become saturated and there are few new adopters.
Competition increases, so product features may need to be enhanced to maintain market share.
While unit sales are at their highest at this stage, prices tend to decline to stay competitive.
Companies usually do not need additional funding at this stage.

Decline Stage

The decline stage of the product life cycle is associated with decreasing sales due to
market saturation, high competition, and changing customer needs. Companies at this stage
have several options: They can choose to discontinue the product, sell the manufacturing rights
to another business that can better compete or maintain the product by adding new features,
finding new uses for the product, or tap into new markets through exporting. This is the stage
where packaging will often announce “new and improved.”

Here, both sales and profits are declining in the decline stage. The strategy is to incur
minimal or no expenditure on this product and milk it as much as possible before it declines
completely. Hence prices are cut. Promotion is minimized and a strategy of product
deletion or product elimination is also considered.

.0 ADVANTAGES AND DISADVANTAGES OF LCC


Advantages of LCC
Analyzing the life cycle cost of a facility or property offers a variety of short-term and
long-term advantages. First benefit of life cycle costing is management can make better
decision. Life cycle costing can help management to understand the cost consequences of
developing and making a product and to identify areas in which cost reduction efforts
are likely to be most effective. Second benefit is in term of improve Forecasting. Life cycle
forecasting enables a comprehensive assessment of the profitability of a product over its
entire life. Does it help managers decide which product to produce. Third benefit of LCC is
cost reduction. Life cycle budget provide useful information for managing and reducing cost.
Major cost saving can be archive by recognizing the threat of between cost incurred prior to
production and cost incurred once production begin.
Disadvantages of LCC
Life cycle costing also considers having disadvantage. First disadvantage LCC is
higher cost and time consuming. The longer the project lifetime, the more cost will be
incurred due to planning and analysis works. Management take more time to make decision
whether the product should be produced or not. Second disadvantage LCC is high sensitivity

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to changing requirements. LCC model is very complex, it is highly sensitive to change input
data. When there have small changes in the current situation or condition, it may have a
considerable impact. Last disadvantage of LCC is outdated technology. Since technology
change and is innovated in every single day, the lifecycle costing for certain product will be
outdated.

.0 APPLICATION OF LIFE CYCLE COSTING


The application of life cycle costing is based on four basic concepts which are cost
breakdown structure, cost estimating, discounting and inflation. Cost breakdown structure,
which basically involves the identification of relevant cost elements of a project during it
operational life, is considered a crucial task in the analysis of life cycle costing. Cost breakdown
structure is followed by cost estimation which calls for the calculation of the costs for each
category. Once cost estimation is made the next steps is to compare the same with the benefits
that are expected from the project during the period. To make such an analysis fair, a common
scale for both costs and benefit is essential.

Thus, life cycle costing analysis suggests using “discounting” for this purpose. Further, life
cycle costing advocates that impact of inflation must be ascertained in the analysis. LCC is
more heavily apply by businesses that take place an emphasis on long range planning such as
construction sector. Life cycle costing in construction is really mean because it can easily
see what cost sources influence your total cost of ownership the most. When the major
expenditure sources are clear, you can quickly identify hotspots for improvement in your
baseline design and test different solutions for the existing objectives. Knowing your
alternatives, you can compare their benefits and accordingly relocate the costs to gain
maximum value out of your project.

The understanding of life cycle costs can lead to a drastic reduction of the total cost of
building ownership. LCC allows you to find the most optimal costing solution for your building
project, to compare between design alternative, and to choose the one that will boost your
project’s value. Therefore, the earlier is performed the better the result, since it is easier to make
changes in the design stage.

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REFERENCES

1. Dess, McNamara, Eisner,Lee. (2019). Strategic Management. New York (USA):


McGraw-Hill Education
2. M.A. Sahaf. (2013). Management Accounting: Principles & Practice, 3rd Edition. India:
Vikas Publishing House
3. https://managementaccountingandstrategy.com/life-cycle-costing
4. Life Cycle Costing: Meaning, Characteristics and ... (n.d.). Retrieved from
http://www.accountingnotes.net/cost-accounting/life-cycle-costing/life-cycle-costing-
meaning-characteristics-and-everything-else/5783
5. Acca. (n.d.). Target costing and lifecycle costing. Retrieved from
https://www.accaglobal.com/ca/en/student/exam-support-resources/fundamentals-
exams-study-resources/f5/technical-articles/target-lifestyle.html

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