TOPIC:

STRATEGIC MANAGEMENT ACCOUNTING

TECHNIQUES

Contemporary Strategic Management

Accounting Techniques

LIFE CYCLE COSTING

 LIFE CYCLE COSTING
Introduction
 At the start of any project, it is important
to understand the costs involved
 Traditional methods simply look at start
up costs, cash flow and profit or loss
 Focused primarily on the manufacturing
stage of product life cycle
 d
Pre & post – manufacturing are treate
as expenses costs
LIFE CYCLE COSTING
Definition
 Life cycle costing is defined as the total cost
throughout its life including planning, design,
acquisition & support costs & any other costs directly
attributable to owning / using the asset.
 Category of LCC Capital assets :
• Initial costs
• Operating costs
• Disposal costs
LIFE CYCLE COSTING
Simple Formula:
Capital
+
lifetime operating costs
+

LCC = lifetime maintenance costs

+
disposal costs
–
residual value
A company is planning a new product. Market research
information suggests that the product should sell 10,000 units
at RM21/unit. The company seeks to make a mark- up of
40% product costs. It is estimated that the lifetime costs of
the product will be as follows :
1. Design and development costs RM50,000
2. Manufacturing costs RM10/unit
3. End of life costs RM20,000

Required : What is the original lifecycle costs per unit?

LCC/unit =
RM50,000 + ( 10,000 units x RM10 ) + RM20,000 /10,000
units
= RM 17
 LIFE CYCLE COSTING

• Assists management to smartly manage total

cost throughout product’s life cycle.
• To identify areas in which cost reduction efforts
are likely to more effective.
• To estimate the cost impact of various designs
and support options.
 Life-cycle costing concept

 Help management to understand the cost consequence

of developing and making a product and to identify
areas which cost reduction efforts are likely to be most
effective.

 The process of LLC fundamentally involves :

 Assessing cost arising from an assets over its life
cycle
 Evaluating alternatives that have impact on this cost
ownership
 Life-cycle costing concept

 Useful apply to low-technology issues, such as repair

versus replace decisions
 Eg-the New York State Throughway Authority uses life
cycle concept to determine the point at which it is more
expensive to repair than to replace bridges (Morse, Davis
& Hartgraves third edition)
 Aspects of Life Cycle Costing

 There are 2 important point :

 The focus on the product cost
 The inclusion of all upstream and downstream
cost

 A Product Life Cycle (PLC) may be classified into 3

broad stages, namely :
 Planning and Design
 Manufacturing and Sales
 Service and abandonment
 LIFE CYCLE COSTING

After
Research & Design Production ting n
Development
Sales
Marke Distributio Service

PRODUCT MANUFACTURING ERVICE

PLANNING & & &
DESIGN STAGE SALES STAGE ABA NDONMENT
STAGE
 Stages of Product Life Cycle

 Planning and design stage

Research and development cost, costs of
product design, etc

 Manufacturing stage
Witnesses both growth and maturity
in sales. All the manufacturing,
marketing, selling and distribution
costs are incurred at this stage
 Stages of Product Life Cycle

 Service and abandonment stage

• This stage signified by a decline in a sales
volume
• The demand for the product declines at
this stage. The producers may be required
to provide after sales service for the
already sold products
• Costs that are incurred in this stage
include all costs relating to after sales
service including provision of spares and
expert services and costs of abandonment
and disposal of the product
 Costs Committed and Cost Incurred

Cost that have not yet been incurred but will be incurred in
the future on the basis of decision already been taken are
termed committed costs
Cost incurred when a resource is used or sacrificed. The actual
cost of product is built up mostly in the growth stage and
matured stage.
Costs incurred vis-à-vis the costs committed at different stages
of the product life-cycle are compared in the following diagram.
Comparison of costs committed and cost incurred in
product life-cycle stage
 Advantages of LCC

Improve forecasting
• the application of LCC technique allows the full cost associated
with a procurement to be estimated more accurately.
Improved awareness
• Provide management with an improved awareness of the factors
that drive cost and the resources required by the purchase.
Performance trade-off against cost
• LCC technique not only focus on cost but also consider other
factors like quality of the goods and level of service to be
provided.
 Disadvantages of LCC
Time Consuming
• Life cycle costing analysis is too long because of
changes of new technology.

Costly
• The longer the project life time, the more operating
cost will be incurred.

Technology
• Technology always change day to day.
 • Knowing life cycles ensures
Pricing appropriate price of the
products.

• Highlights the cost consequences

of developing and making a
Performance product.
Implications of
Management • To identify areas in which cost
Life-Cycle Costing reduction efforts are likely to be
most effective.

• Provides premises for decision-

Decision making regarding product
introduction, product mix,
Making discontinuation of products.
Life-cycle estimates and accumulates costs over a
product entire life-cycle.
To determine whether the profits earned during
the introduction and growth phase will cover the
costs incurred during the pre and post matured
stage.
To estimate the life-cycle costs it is essential to
identify the cost incurred through different stage
of life-cycle product.
Only on knowing the life cycle costs of a product
can one appropriately decide on its price.
If viewed from the angel of customer life-cycle
costs, the life cycle costs provide input for pricing
across the lifecycle.
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
LCC forms an input to evaluation processes such as value
management, economic appraisal and financial appraisal
The management of time is immensely important if the
profit of a product is to be maximized.
LCC provides a long-term picture of product
profitability, feedback on the effectiveness of
initial planning and cost data to clarify the
economic impact of alternatives like design.

It also considered a way to enhance the control of

manufacturing costs.
When viewed as a whole, cost reduction and
minimization opportunities as well as revenue
extension opportunities
It provide premises for decision-making
regarding product introduction, product mix
and regarding discontinuation of the products.
The management can know whether the revenue earned by the
product is sufficient to cover the costs incurred during its life-cycle

There are opportunities for cost reduction and minimization (and

thereby scope for profit maximization)

We will find out about the costs involved at different stages of the
life-cycle and the implications of life-cycle costing on pricing,
performance management and decision making.