A3

Get through intro

So far, we have come across accounting systems which report costs and revenue by splitting them into time
periods such as a month, a year, etc. This prevents consideration of the total profitability of an individual product
or any other cost object and therefore does not allow the full picture to be seen.
Life-cycle costing, on the contrary, traces all costs and revenue of a cost object (i.e., a product or service) from
the stage of product planning to after sales service and ultimate abandonment and disposal (i.e., the period from
Cradle to Grave).
This Study Guide will help learners to understand the cost consequences of developing and manufacturing a
product and to identify areas in which cost reduction efforts are likely to be most effective during the entire
product life-cycle.
You need to understand the concept of life-cycle costing so that, as management accountants, you can find out
and inform management whether the profits earned by a product during the manufacturing stage will be able to
cover the costs incurred during the pre-manufacturing (development, design, etc.) and post-manufacturing stage
(after sales service, product support, etc.) or not.

1)
2)

Identify the costs involved at different stages of the life-cycle

Explain the implications of life-cycle costing on pricing, performance management and decisionmaking

A3.2: Specific Cost And Management Accounting Techniques

GTG

Introduction
Let us look at an example to understand the concept of life-cycle costing. Easy -accounting is an accounting
software package which has a six year product life-cycle. The following are the year-wise costs estimated during
its life-cycle:
Cost Items

Year 1
$

Research & Development costs

Year 2

Year 3

Year 4

Year 5

Year 6

280,000

Design costs

125,000

Production costs

115,000

202,000

85,000

Marketing costs

150,000

210,000

135,000

50,000

12,000
5,000

20,000
20,000

8,500
45,000

5,000
55,000

Distribution costs
Customer-service costs

The life-cycle costs for the Easy-accounting package are as follows:

Life-cycle costs

Research & Development costs

280,000

Design costs

125,000

Production costs

402,000

Marketing costs

545,000

Distribution costs
Customer-service costs
Total Life-cycle costs

45,500
125,000
1,522,500

It clearly takes into consideration the costs of the package incurred during the entire life-cycle. Accordingly, from
life-cycle costing, the management can know whether the revenue earned by the product is sufficient to cover
the whole costs incurred during its life-cycle.
When viewed as a whole, there are opportunities for cost reduction and minimisation (and thereby scope for
profit maximisation) whereas these are unlikely to be found when management focuses on maximising profit on
a periodby-period basis.
In this Study Guide, 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.

1. Identify the costs involved at different stages of the life-cycle

[Learning outcome a]
The term life-cycle costing encompasses both the concepts of product life-cycle cost and customer life-cycle
cost.
1.1 Conceptualising product life-cycle
The term product life-cycle refers to the succession of stages a product goes through. It is claimed that every
product has a life-cycle. It is launched; it grows and may, at some point of time, die. The progression of a
product through these stages is however, not certain. Some products seem to stay in one stage forever (e.g.
milk).

 GTG Life-Cycle Costing: A3.3

A product life-cycle may be classified into three broad stages. Each of the stages include at least one of the
business functions namely, Research and Development, Design, Production, Marketing, Distribution and
Customer service. The stages of a life-cycle are:

1. The planning and design stage. This stage includes the following business functions:
1) Research and Development
2) Design
2. The manufacturing and sales stage. This stage includes the following business functions:
1) Production
2) Marketing
3) Distribution
3. The service and abandonment stage. This stage includes the following business functions:
1) After sales service
2) Disposal of production facility
Diagram 1: Identify the business functions involved at different stages of a product life-cycle

1.2 Costs committed and costs incurred

1. The costs that have not yet been incurred but will be incurred in the future on the basis of decisions that
have already been taken are termed committed costs.

Studies show that about 80% of the life-cycle costs of a product are committed at its planning and design stage.
It is difficult to significantly alter costs after they have been committed.
Example
The planning and design stage of a product determines its material and labour inputs and the production
process. At this stage, costs become committed and broadly determine the future costs that will be incurred
during the manufacturing stage.

2. Costs are incurred when a resource is used or sacrificed. The actual cost of a product is built up mostly in

the manufacturing stage and in the service and abandonment stage. Costs incurred vis--vis the costs
committed at different stages of the product life-cycle are compared in the following diagram:

A3.4: Specific Cost And Management Accounting Techniques

GTG

Diagram 2: Comparison of costs committed and cost incurred in product life-cycle stages

Stages of product life-cycle

1.3 Costs involved at different stages of product life-cycle
For each of the business functions at each stage of life-cycle of each product, costs keep on being incurred.
Let us try to identify the possible costs at each stage of the life-cycle:

1. At the planning and design stage: Research and Development cost, Costs of product design, etc.
2. At the manufacturing stage: This stage witnesses both growth and maturity in sales. All the manufacturing,
marketing, selling and distribution costs are incurred at this stage.

3. At the service and abandonment stage: This last stage of the product life-cycle is signified by a decline in

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.

Life-cycle costing refers to the system that tracks and accumulates every individual cost which is
incurred during the whole life cycle of a product starting from its initial planning stage to the post
sales service and abandonment stage.
Diagram 3: Time frame of a typical Product Life-Cycle Cost

 GTG Life-Cycle Costing: A3.5

1.4 Conceptualising customer life-cycle costing
A different notion of life-cycle costs is customer life-cycle costs. Customer life-cycle costs include the total costs
incurred by a customer to acquire and use a product or service until it is replaced. Customer life-cycle costs for
a car, for example, include the cost of car itself plus the costs of operating and maintaining the car less the
disposal price of the car. Customer life-cycle costs can be an important consideration in the pricing decision.
The best way to understand customer life-cycle costing is to look at an example.
Example
Suppose you are shopping for a new water heater. One costs $50 more than the other, but is better insulated
and has a lower operating cost. Lets assume they can both last ten years. It is observed that if one costs $25
more per year to operate, that difference amounts to $250 over the ten years. If we discount those savings back
to today and also consider the current inflation rate, it is worth about $200 today. Since that is much more than
the purchase cost difference, an initial investment of $50 is worth it from your point of view as a consumer. On
the other hand, the manufacturer of the better insulated variety of water heater may think of increasing its
product price considering its much advantageous customer life-cycle cost.
SYNOPSIS
Costs involved at different stages of life-cycle

2. Explain the implications of life-cycle costing on pricing, performance management and decisionmaking

[Learning outcome b]

2.1 Implications of life-cycle costing on pricing

Most accounting systems report revenue, costs and profit on a periodic basis, and product profits are not
monitored over their life-cycle. A failure to trace all costs of products over their life-cycle hinders managements
understanding of product profitability, because a products actual life-cycle profit is unknown.
Life-cycle costing estimates and accumulates costs over a products entire life-cycle so as to determine whether
the profits earned during the manufacturing phase will cover the costs incurred during the pre- and postmanufacturing stages. To estimate the life-cycle costs it is essential to identify the costs incurred through
different stages of life-cycle of a product.
Only on knowing the life-cycle costs of a product, can one appropriately decide on its price.
Moreover, if viewed from the angle of customer life-cycle costs, the life-cycle costs provide input for pricing
across the lifecycle.
Example
An automobile manufacturers aim is to design cars that would minimise maintenance cost. The company
expects to charge a higher price and / or gain greater market share by selling these cars. Similarly,
manufacturers of washing machines and dishwashers charge higher prices for models that save electricity and
have low maintenance costs.
2.2 Implications of life-cycle costing on performance management
Life-cycle costing 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.

A3.6: Specific Cost And Management Accounting Techniques

GTG

Since life-cycle analysis highlights the committed costs of a product, it is possible, through emphasis on product
planning, product design and development, to reduce product cost during its life-cycle. Life-cycle costing forms
an input to evaluation processes such as value management, economic appraisal and financial appraisal.
The old proverb, time is money, still holds true. The management of time is immensely important if the profit of
a product is to be maximised. The management of time is particularly emphasised in life-cycle costing. Since a
reduction in time during the development stage causes a decrease in cost or an increase in revenue, it in turn
causes an increase in profit.
2.3 Implications of life-cycle costing on decision-making
The importance of life-cycle costing lies in the consideration of the whole life-cycle.
Life-cycle costing 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 chosen in the design, engineering phase
etc. It is also considered a way to enhance the control of manufacturing costs.
When viewed as a whole, cost reduction and minimisation opportunities as well as revenue extension
opportunities will present themselves. It provides premises for decision-making regarding product introduction,
product mix and regarding discontinuation of the products.
SYNOPSIS

Quick Quiz

1. What is meant by the term product life-cycle costing?

2. What is meant by the term customer life-cycle costing?
3. State the concept of the committed cost
4. Briefly state the stages of a product life-cycle
5. Briefly describe the implications of life-cycle costing on performance management
Answer to Quick Quiz

1. Product life-cycle costing estimates and accumulates costs over a products entire life-cycle (sometimes a
span of several calendar periods). It helps to identify whether the profits earned during the manufacturing
stage will cover the costs incurred during the pre- and post-manufacturing stages.

2. Customer life-cycle costing involves calculating the total costs incurred by a customer to acquire and use a
product or service until it is replaced. Customer life-cycle costs for a car, for example, include the cost of car
itself plus the costs of operating and maintaining the car minus the disposal price of the car.

3. The costs that have not yet been incurred but will be incurred in the future on the basis of decisions that

have already been taken are termed committed costs (e.g. depreciation of any non-current asset)

 GTG

Life-Cycle Costing: A3.7

4. A product life-cycle may be classified into three broad stages. Each of the stages includes at least one of

the business functions namely, Research and Development, Design, Production, Marketing, Distribution and
Customer service. The stages of a life-cycle are:
(a) The planning and design stage. This stage includes the following business functions:

1. Research and Development

2. Design
(b) The manufacturing and sales stage. This stage includes the following business functions:

1. Production
2. Marketing
3. Distribution
(c) The service and abandonment stage. This stage includes the following business functions:

1. After sales service

2. Disposal of production facility
5. Life-cycle costing 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.

Since life-cycle analysis indicates the committed costs of a product, it is possible, through emphasis on
product planning, product design and development, to reduce product cost during its life-cycle. Life-cycle
costing forms an input to evaluation processes such as value management, economic appraisal and
financial appraisal.

Self Examination Questions

Question 1
Futuristic Software Inc, a computer software company is developing a new accounting package, Future
Accounting. The following are the budgeted amounts for Future Accounting Package over a six-year product
life-cycle.
Year 1 and 2
Research and Development costs
Design costs

Year 3 to 6
Production costs
Marketing costs
Distribution costs
Customer-service costs

$
360,000
240,000

One-Time
Setup Costs
$
150,000
105,000
75,000
120,000

Variable Cost
per package
$
37.50
36
24
45

To be profitable, Futuristic Software Inc must generate revenues to recover costs of all six-business functions
taken together and, in particular, its high non-production costs.
Futuristic Software Inc wants to decide between three alternative selling prices i.e., $350, $430 and $550, so as
to maximise life-cycle operating income. Sales volumes at these prices have been estimated at 7,500 units,
6,000 units and 3,750 units respectively. Identify which option maximises life-cycle operating income.

A3.8: Specific Cost And Management Accounting Techniques

GTG

Question 2
Ace-soft Technologies Plc is examining the profitability and pricing policies of three of its recently developed
software packages:
Electrical Genius: package for electrical engineers
Mechanical Genius: package for mechanical engineers
Industrial Genius: package for industrial engineers
Summary details on each package over their two-year cradle-to-grave product lives are as follows:
Number of units sold
Package

Selling
Price $

Electrical Genius
Mechanical Genius
Industrial Genius

Year 1

Year 2

235

2,.150

8,100

285

2,200

3,150

185

5,100

3,700

Assume that no inventory remains on hand at the end of year 2.

Ace-soft Technologies is deciding which product lines to emphasise. In the past two years, profitability has been
mediocre. Ace-soft Technologies is particularly concerned with the increase in R & D costs. An analyst pointed
out that for one of its most recent packages (Industrial Genius), major efforts had been made to reduce R &D
costs.
The engineering software manager decides to collect the following life-cycle revenue and cost information for
the Electrical Genius, Mechanical Genius and Industrial Genius packages:
Electrical Genius

Mechanical Genius

Industrial Genius

Year 1
$
505,250

Year 2
$
1,903,500

Year 1
$
627,000

Year 2
$
897,750

Year 1
$
943,500

Year 2
$
684,500

R & D cost

760,000

495,000

215,000

Design of product

215,000

25,000

115,000

7,750

83,500

12,000

55,250

221,000

90,000

90,000

162,000

54,000

Marketing

155,000

395,000

132,000

153,000

224,000

198,000

Distribution

19,000

66,500

23,000

33,000

58,000

35,000

Customer service

45,000

270,000

33,000

99,000

202,000

322,000

Revenues
Costs:

Manufacturing

Required:

(1) How does a product life-cycle income statement differ from a conventional income statement? What are the
benefits of using a product life-cycle reporting format?

(2) Present a product life-cycle income statement for each software package. Which package is the most
profitable, and which is the least profitable? Ignore the time value of money.

(3) How do the three software packages differ in their cost structure (the percentage of the totals costs in each
cost category)?

Question 3
Donald products make digital cameras. Donald is preparing a product life-cycle budget for a new digital camera,
DC3. Development on the new digital camera is to start shortly. Estimates for DC3 are as follows:

GTG

Life-Cycle Costing: A3.9

$
800,000
80

Life-cycle units manufactured and sold

Selling price per camera
Life-cycle costs:
R & D and design costs
Manufacturing:
Variable cost per camera
Variable cost per batch
No. of batches
Fixed costs
Marketing:
Variable cost per camera
Fixed costs
Distribution:
Variable cost per batch
No. of batches
Fixed costs
Customer-service costs per camera

2,000,000
30
1,200
1,000
3,600,000
6.40
2,000,000
560
320
1,440,000
3.00

Ignore the time value of money.

Required:

(1) Calculate the budgeted life-cycle operating income for the new digital camera.
(2) What percentage of the budgeted total product life-cycle costs will be incurred by the end of the R & D and
(3)
(4)

design stages?
An analysis reveals that 80% of the budgeted total product life-cycle costs of the new digital camera will be
committed at the R & D and design stages. What are the implications for managing DC3s costs?
Donalds Market Research Department estimates that reducing DC3s price by $6 will increase life-cycle unit
sales by 10%. If unit sales increase by 10%, design plans to increase manufacturing and distribution batch
sizes by 10% as well. Assume that all variable costs per camera, variable cost per batch, and fixed costs will
remain the same. Should Donald reduce DC3s price by $6? Show your calculations.

Answers to Self Examination Questions

Answer 1
Statement showing comparison of alternative life-cycle revenue, life-cycle costs and life-cycle operating
income

Selling price per package

Sales quantity in units

Alternative Selling Price/

Sales-Quantity Combination
A
B
C
$350
$430
$550
7,500
6,000
3,750

A. Life-cycle revenues
B. Life-cycle costs :
R & D costs
Design cost of product/ process
Production costs (w1)
Marketing costs (w2)
Distribution costs (w3)
Customer-service costs (w4)

$2,625,000

$2,580,000

$2,062,500

$360,000
$240,000
$431,250
$375,000
$255,000
$457,500

$360,000
$240,000
$375,000
$321,000
$219,000
$390,000

$360,000
$240,000
$290,625
$240,000
$165,000
$288,750

Total life-cycle costs

C. Life-cycle operating income (A - B)

$2,118,750
$506,250

$1,905,000
$675,000

$1,584,375
$478,125

A3.10: Specific Cost And Management Accounting Techniques

GTG

Clearly, alternative B with a selling price per package of $430 and a sales volume of 6,000 units yields the
highest operating income.
Workings

1. Production costsFor A, $150,000 + (7,500 units x $37.50/package) = $431,250

For B, $150,000 + (6,000 units x $37.50/package) = $375,000
For C, $150,000 + (3,750 units x $37.50/package) = $290,625

2. Marketing CostsFor A, $105,000 + (7,500 units x $36/package) = $375,000

For B, $105,000 + (6,000 units x $36/package) = $321,000
For C, $105,000 + (3,750 units x $36/package) = $240,000

3. Distribution costsFor A, $75,000 + (7,500 units x $24/package) = $255,000

For B, $75,000 + (6,000 units x $24/package) = $219,000
For C, $75,000 + (3,750 units x $24/package) = $165,000

4. Customer-service costsFor A, $120,000 + (7,500 units x $45/package) = $457,500

For B, $120,000 + (6,000 units x $45/package) = $390,000
For C, $120,000 + (3,750 units x $45/package) = $288,750
Note
Life-cycle costs provide useful information for strategically evaluating pricing decisions.
While calculating life-cycle revenue and life-cycle costs, it may be noted that calculation of annual revenue
or annual cost is meaningless. Here, the revenue and the costs for the entire life-cycle of the product will
have to be considered. Again, in annual accounts, the non-production costs such as Research and
development cost and Design cost are normally considered as deferred cost and are amortized during the
useful life of the product. But, so as to know the life-cycle revenue and costs of the product, one needs to
consider revenue and costs for the whole life-cycle.
Answer 2

(1) Difference between a product life-cycle income statement and a conventional income statement
A product life-cycle income statement considers all revenue earned and all costs incurred during the lifecycle of a product. The life-cycle of the product may span a number of years.
On the other hand, in a conventional accounting system, income statements are prepared periodically, i.e.
product costs and revenues are reported period-wise. This prevents consideration of the total profitability of
an individual product or any other cost object and does not allow the full picture to be seen.
Moreover, the life-cycle costs will include the research and development cost and the design cost. In
contrast, in a conventional accounting system, the non-production costs such as research and development
cost and design cost are normally considered to be deferred costs and are amortized during the useful life
of the product.
The benefits of using a product life-cycle reporting format:
Life-cycle costing provides a long-term picture of product profitability, feedback on effectiveness of initial
planning and cost data to clarify the economic impact of alternatives chosen in the design, engineering
phase etc.
It is also considered a way to enhance the control of manufacturing costs.
When viewed as a whole, cost reduction and minimisation opportunities as well as revenue extension
opportunities will present themselves. It provides premises for decision-making regarding product
introduction, product mix and regarding discontinuation of the products.

 GTG Life-Cycle Costing: A3.11

(2) Alhough not desired in the problem, a conventional income statement has been prepared so as to show the
difference between the conventional income statement and the product life-cycle income statement
Step 1
Prepare the conventional income statement
Conventional Income Statement

Revenues
Costs:
R & D cost
Design of product
Manufacturing
Marketing
Distribution
Customer
service
Total cost
Net operating
income

Electrical Genius
Year 1
Year 2
$
$
505,250
1,903,500

Mechanical Genius
Year 1
Year 2
$
$
627,000
897,750

Industrial Genius
Year 1
Year 2
$
$
943,500
684,500

760,000
215,000

0
25,000

495,000
115,000

0
7,750

215,000
83,500

0
12,000

55,250
155,000
19,000

221,000
395,000
66,500

90,000
132,000
23,000

90,000
153,000
33,000

162,000
224,000
58,000

54,000
198,000
35,000

45,000
1,249,250

270,000
977,500

33,000
888,000

99,000
382,750

202,000
944,500

322,000
621,000

(744,000)

926,000

(261,000)

515,000

(1,000)

63,500

Step 2
Prepare the product life-cycle income statement
Product Life-Cycle Income Statement
Electrical Genius

Mechanical
Genius

Industrial
Genius

$
2,408,750

$
1,524,750

$
1,628,000

R & D cost

760,000

495,000

215,000

Design of product

240,000

122,750

95,500

Manufacturing

276,250

180,000

216,000

Marketing

550,000

285,000

422,000

Distribution

85,500

56,000

93,000

315,000

132,000

524,000

2,226,750

1,270,750

1,565,500

182,000

254,000

$62,500

Revenues
Costs:

Customer service
Total cost
Net operating income
(for the life-cycle)

From the life-cycle net operating income, it is apparent that Mechanical genius is the most profitable
package. On the other hand, Industrial Genius is the least profitable package.

A3.12: Specific Cost And Management Accounting Techniques

GTG

Workings

A. Revenues
B. Costs:
R & D cost
Design of product
Manufacturing
Marketing
Distribution
Customer service
Total cost
C. Net operating income
(A B)

A. Revenues
B. Costs:
R & D cost
Design of product
Manufacturing
Marketing
Distribution
Customer service
Total cost
C. Net operating income
(A B)

A. Revenues
B. Costs:
R & D cost
Design of product
Manufacturing
Marketing
Distribution
Customer service
Total cost
C. Net operating income
(A B)

GTG
(c) The
cost
structu
res of

Electrical Genius
Year 1
Year 2
$
$
505,250
$1,903,500

Total
$
$2,408,750

760,000
215,000
55,250
155,000
19,000
45,000
1,249,250

0
25,000
221,000
395,000
66,500
270,000
977,500

760,000
240,000
276250
550,000
85,500
315,000
2,226,750

(744,000)

926,000

182,000

Mechanical Genius
Year 1
Year 2
$
$
627,000
897,750

Total
$
1,524,750

495,000
115,000
90,000
132,000
23,000
33,000
888,000

0
7,750
90,000
153,000
33,000
99,000
382,750

495,000
122,750
180,000
285,000
56,000
132,000
1,270,750

(261,000)

515,000

254,000

Industrial Genius
Year 1
Year 2
$
$
943,500
684,500

Total
$
1,628,000

215,000
83,500
162,000
224,000
58,000
202,000
944,500

0
12,000
54,000
198,000
35,000
322,000
621,000

215,000
95,500
216,000
422,000
93,000
524,000
1,565,500

(1,000)

63,500

62,500

Life-Cycle Costing: A3.13

differe
nt
softwa
re
packa
ges
are
display
ed
below
in
percen
tage
terms
Electri
cal
Mec
hani
cal
Geni
us

Geniu
s
Costs
($)
Plann
ing
and
desig
n
costs
R&D
cost
Desig
n of
produ
ct
Manu
factur
ing
and
sales
cost
Manu
factur
ing
Mark
eting
Distri
butio
n
Servi
ce
and
aban
donm
ent
cost
Custo
mer
servic
e

Costs
($)

Indu
stria
l
Gen
ius
Cos
ts
($)

760,00
0

34.13

495,00
0

38.95

215,0
00

13.73

240,00
0

10.78

122,75
0

9.66

95,50
0

6.10

276,25
0
550,00
0

24.70

180,00
0
285,00
0

85,500

3.84

315,00
0

14.15

12.41

22.43

216,0
00
422,0
00

56,000

4.41

93,00
0

5.94

132,00
0

10.39

524,0
00

33.47

14.16

13.80
26.96

2,226,
750

Total

100

1,270,
750

1565,
500

100

Answe
r3

(a)

Produc
t Lifecycle
Incom
e
Statem
ent
Particu
lars
Lifecycle
units
manu
factur
ed
and
sold
Sellin
g
price
per
came
ra
A.
Lifecycle
reven
ue
B.
Lifecycle
costs:
R

800,00
0

80

64,000
,000

&
D
a
n
d
d
e
s
i
g
n
c
o
s
t
s
M
a
n
u

2,000,
000
28,800
,000

100

f
a
c
t
u
r
i
n
g
(
w
1
)
M
a
r
k
e
t
i
n
g
(
w
2
)
D
i
s
t
r
i
b
u
t
i
o
n
(
w
3
)
C
u
s
t
o
m
e
r
s
e
r
v
i
c
e
c
o

7,120,
000

1,619,
200
2,400,
000

s
t
s
(
w
4
)
Tot
al
Life
cycl
e
cost
s

41,939
,200

C.
Lifecycle
opera
ting
incom
e (A B)

22,060
,800

Workin
gs

1.

Total
Manuf
acturin
g Cost:

Fixed
cost

=
$3
,6
00
,0
00
=
$
2
4,
0
0
0,
0
0
0

Variabl
e cost
of
camer
a
(800,0
00
camer
as x
$30/ca
mera)
Variabl
e cost
=
of
$1,200
batch
,000
(1000
batche
sx
$1,200
/batch)

Total
=
$28,

800,
000

2.

Total
Market
ing
Cost:
Fixed
cost
Variabl
e cost
of
camer
a
(800,0
00
camer
as x
$6.40/
camer
a)

=
$2,00
0,000
=
$5,12
0,000

Total = $7,120,000

A3.14: Specific Cost And Management Accounting Techniques

3.

4.

Total Distribution Cost:

Fixed cost
Variable cost of batch
(320 batches x $560/batch)

GTG

= $1,440,000
= $179,200
Total

= $1,619,200

Total Customer-service Cost:

(800,000 cameras x $3.00/camera)

= $2,400,000

(b) The percentage of the budgeted total product life-cycle costs that will be incurred by the end of the R & D
and design stage is

1= (R & D and design cost/Total product life-cycle costs) x 100

2= (2,000,000/41,939,200) x 100
3= 4.77%.
Note
Although the costs committed at the Research and Development and design stage are normally 80%
(approximately) of the budgeted total product cost, the actual costs incurred are only 4.77%.

(3) It had been revealed that the committed costs at the R & D and design stage for the product DC3 were 80%

of the total budgeted costs. This implies that the R & D and design stage itself determines what the
manufacturing cost of the product will be. If an appropriate product design is made by employing the
techniques of value engineering, the actual costs in the subsequent stages of the product life-cycle can be
greatly reduced. To manage DC3s costs, it is necessary in the design stage to identify the product features
which are non-value added and accordingly to curtail these features.

(4) If the price of DC3 is reduced by 6,

The proposed selling of the product will be $ (80 6) = $74
Accordingly, the quantity sold will increase by 10%, i.e., number of units to be sold during the life-cycle will
be 800,000 x 110% = 880,000 units.
Batch size would also increase to $1,100.