Life cycle costing

Product Life Cycle

Project life cycle
 The Product Life cycle
• Product life cycle” is the life cycle of a product from the viewpoint of costs incurred

– Market research
– Specification
– Design
– Prototype manufacturing
– Development (R&D)
– Tooling
– Manufacturing (or providing the service)
– Marketing/distribution
– Product support and customer service
– Decommissioning
• In marketing you would have studied phases of Product Life cycle ???????
• Product life cycle costing involves tracing the costs and revenues over the entire life
cycle of the product.
• How Can we connect the cost part of the product life cycle with the phases of product
life cycle?
 The Cost Life-Cycle (
Product)

Marketing Customer
R&D Design Manufacturing and Service
Distribution

Upstream Activities Downstream

Activities
Design decisions account for much of total product life
cycle costs
 Life cycle costing
• Life cycle costing provides a more complete perspective of
product costs and profitability than pricing based on
manufacturing costs only
• Managers need to be concerned with costs outside the
manufacturing process because upstream and downstream
costs can account for a significant portion of the total life
cycle costs
• The most crucial way to manage these costs is at the design
stage of the product and the manufacturing process
• Decision making at the design stage is critical because
decisions at this point commit a firm to a given production,
marketing and service plan and lock in most of the
products total life cycle costs
 Life-Cycle Costing Example
According to the “traditional” product-line
statements below, ADI-1 appears to be the more
profitable product

Product Line Income Statements

Analytical Decisions, Inc.
ADI-1 ADI-2 Total
Sales $ 4,500,000 $ 2,500,000 $ 7,000,000
Cost of sales 1,240,000 1,005,000 2,245,000
Gross margin $ 3,260,000 $ 1,495,000 $ 4,755,000
R&D 2,150,000
Selling and service 1,850,000
Income before taxes $ 755,000
 Life-Cycle Costing Example (continued)
However, when upstream and downstream (i.e.,
life-cycle)
costs are considered, ADI-2 is actually more
profitable
Life-Cycle Costing
Analytical Decisions, Inc.
ADI-1 ADI-2 Total
Sales $ 4,500,000 $ 2,500,000 $ 7,000,000
Cost of sales 1,240,000 1,005,000 2,245,000
Gross margin $ 3,260,000 $ 1,495,000 $ 4,755,000
R&D 1,550,000 600,000 2,150,000
Selling and service 1,450,000 400,000 1,850,000
Income before taxes $ 260,000 $ 495,000 $ 755,000
 Project Life cycle
• Would you buy a machine only by looking at its purchase
price?
• Project life cycle costs are incurred for the acquisition of Fixed
assets
• Future costs associated with the use and ownership of the
asset may often be greater than the initial acquisition cost
• What could be all the costs associated with a project life
cycle?
• The asset may be constructed in house or may be purchased
from a supplier .