LIFE CYCLE COSTING

LIFE CYCLE COSTING

1. Tracks and accumulates costs and revenues

   • attributable to each product over its entire product lifecycle.
     • Hence, the total profitability of any given product can be determined.

2. A products life cycle is divided into different stages or phases

   • Design Phase
     • Also called as pre production phase
     • A high level of setup costs will be incurred in this stage (preproduction costs), including research and development (R&D), product design and building of production facilities.
     • 90% of the products costs are locked in at this stage
       • Management Accounting systems should therefore be developed that aid the planning and control of product lifecycle costs and monitor spending and commitments at the early stages of a product's life cycle.
     • Launch & Production Phase
       • Also called as market development stage
       • Success depends upon awareness and trial of the product by consumers, so this stage is likely to be accompanied by extensive marketing and promotion costs.
       • Material, labour, overheads, machine set up, inventory, training, production machine maintenance and depreciation
       • Growth or Operation stage
         • In this stage sales volume increases dramatically, and unit costs fall as fixed costs are recovered over greater volumes
         • Distribution, advertising and warranty claims
         • Maturity Stage
           • Decline Stage
             • Environmental clean-up, disposal and decommissioning
             • Marketing costs are usually cut as the product is phased out
             • Production economies may be lost as volumes fall
             • Alternatively additional development costs may be incurred to refine the model to extend the lifecycle (this is typical with cars where ‘product evolution’ is the norm rather than ‘product revolution’).
           • profits will continue to increase as the fixed costs are recovered and the firm still benefit from the economy of large scale production
           • the competition will get tight
   • DLp G M D

3. It recognises that for many products there are significant costs to be incurred in the early stages of its life cycle.