• Life-cycle costing offers a different

way to look at overall product costs

than other types of costing such as
job-order, process, and activity-
based costing.
 The Cost Life Cycle

•“ Cost life cycle ” refers to the following

sequence of activities :
§
–R&D
–Design
–Manufacturing (or providing the service)
–Marketing/distribution
–Customer service
§
•It is the life - cycle of a product or
service from the viewpoint of costs
incurred

3
 The Cost Life - Cycle
( continued )

Marketing
Marketing
RR& Customer
Customer
&DD Design
Design Manufacturing and
and
Manufacturing
Service
Service
Distribution
Distribution

Upstream Activities Downstream

Activities
Design decisions account for much of total product life
cycle costs

4
 The Sales Life - Cycle

•Sales life cycle is the sequence of phases

in the product ’ s or service ’ s life :
–Introduction of the product or service to the
market
–Growth in sales
–Maturity
–Decline
–Withdrawal from the market
• It is the life - cycle of a product or
service from the viewpoint of sales volume
achieved
5
 The Sales Life - Cycle

Important
strategic
cost
Sale

Maturity management
s

Growth issues arise

Decline in each stage
Introducti
on of the life-
cycle.

Time
6
 What is Life Cycle Cost?
• An economic analysis procedure that uses
engineering inputs

• Compares competing alternatives considering all

significant costs

• Expresses results in equivalent dollars (present

worth)
 Life-Cycle
Costing
 Life-cycle costing provides a more
complete perspective of product costs and
profitability


– Managers need to be concerned with costs

outside the manufacturing process because
upstream and downstream costs can
account for a significant portion of total life-
cycle costs
–
– The most crucial way to manage these costs is
at the design stage of the product and the
manufacturing process 8
 Life-Cycle Costing
(continued)

 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 firm’s life
cycle costs.


9
 Life cycle costing
• Considers entire life cycle of product from
start to finish
• Provides important information for pricing
decisions
• For example, if a mobile phone is built, if
the R&D costs are high for the
company, the repairs and maintenance
cost to the customer may be low; so the
life cycle is across the life of the product
and considers costs and impact on
prices www.venturebean.com 10
 Cost Considerations
Present Worth

Salvage
Costs

Initial Cost
Rehabilitation Cost Maintenance and
Costs

 Inspection
Cost


 Years

Salvage
Value
 Life cycle costs
• Upstream costs
– R&D, design, prototyping, testing,
quality development
• Manufacturing/Operations costs
– Purchasing, manufacture/service
• Downstream costs
– marketing, sales and distribution,
customer service and warranty
 Life cycle costs
• Product life cycle costs vary with
industry and nature of industry
• R&D is not only at start of product
life, this may also occur at other
stages, ie development of
additional features in product
• Life cycle may also depend on
markets targeted, ie country,
region, socio-economic
background etc.
 Implementation of LCC
• Identify stages in product life cycle
• Identify target customer
• Understand target customers
perspective and estimate need
• Analyse cost and pricing in detail
• Educate employees about LCC


•
 Implementation of LCC
• Develop product and pricing structure
based on LCC
• Create appropriate organisation structure
for implementation
• Educate customer on LCC, eg. mobile
phone referred to in earlier slide
• Focus on strategic marketing to address
customer requirements and needs,
stated and unstated
• Continuous life cycle budgeting and
monitoring and modify/change as
required
 Life cycle costing benefits
• Optimisation of profit over product
life
• Full set of costs associated with
products are ascertained
– Most accounting systems capture
manufacturing costs
– Other areas like R&D at start and
customer service as close do not
get much importance
 Life cycle costing benefits
• Differences in percentages in
committed costs at initial stage of
business is highlighted
– The higher the initial costs, the more
critical it is for management to
develop better predictions about
revenues
–



 Life cycle costing benefits
• Interrelationships across cost
categories are highlighted
– Many companies with high R&D &
product refinement costs may
experience less customer service
costs and vice versa. Such costs
are often hidden and affect quality
of product
–

 W h a t?
Life Cycle Costing
The LCC Message!
Life Cycle Costing (LCC) helps you to . . .

11. . reduce
reduce costs
costs and
and
22. . improve
improve life
life cycle
cycle performance
performance

. . . through . . .

••identification
identification, ,
••evaluation
evaluation and
and
••more
more accurate
accurate allocation
allocation of
of life
life cycle
cycle
costs
costs. .
 W h a t?
Life Cycle Costing
What are Life Cycle Costs?
Life cycle costs can
be . . . hidden
••potentially
potentially hidden costs
costs;;
ee.g.g. . costs
costs for
for purchasing
purchasing, , processing
processing and
and disposing
disposing
non
non--product
product output output ((NPO
NPO),), costs
costs for
for inefficient
inefficient resource
resource--
use
use, , insurance
insurance, , monitoring
monitoring, , training
training. .
••contingent
contingent costs costs;;
ee.g.g. . costs
costs for
for penalties
penalties, , natural
natural resource
resource or
or
personal
personal injuryinjury damages
damages, , future
future compliance
compliance costs
costs. .
••image
image and
and relationship
relationship costs
costs. .
ee.g.g. . costs
costs for
for advertising
advertising, , lower
lower earnings
earnings due
due to
to
environmental
environmental image image. .
 W h a t?
Life Cycle Costing
Functions of LCC

LCC intends to:



•
• promote more accurate costing and
pricing;
•
• help identify potentials for cost
reduction;
•
• provide information on life cycle
costs;
 W h e re ?
Life Cycle Costing
LCC - A Management Accounting Tool
LCC is primarily used
 Business decisions
• benefitting from LCC:
•by management •product design
•for internal purposes •process design
•facility siting
•to support decision- •procurement
making in various •processing
business areas . . . •waste management
•risk management
•capital investments
•costing and pricing
•

Source: US EPA
 W h y?
Life Cycle Costing
Information Gap
Disposal costs are just the tip of the iceberg

costs
for disposal

other
life cycle
costs
 W h y?
Life Cycle Costing
Information Gap and Resulting Problems
•Traditional accounting systems are incomplete in scope
because they overlook important environmental costs (and
potential cost savings and revenues), which can be a
significant component of a company’s overall cost
structure.
•
•The failure to include environmental costs adequately in
financial analyses has the effect of sending the wrong
financial signals to managers.
•
•When environmental costs are not adequately allocated,
cross-subsidisation occurs between products.
 W h y?
Life Cycle Costing
Benefits of LCC
••cost
•
cost reduction
reduction and
and avoidance
avoidance;;
••profitability
profitability enhancement
•

•
enhancement;;
••increased
increased product
product quality
•

•
quality;;
••staff
staff motivation
•

•
motivation;;
••better
better decision
decision--making
making including
including life
life cycle
cycle aspects
•

•
aspects;;
••satisfying
satisfying information
information demands
•

•
demands;;
••improvement
improvement of
of life
life cycle
cycle performance
•

performance. .

COMPETITIVE
COMPETITIVE ADVANTAGE
ADVANTAGE
 H ow ?
Life Cycle Costing
Further Opportunities
Non
Non--product
product output
output ((NPO
NPO))

NPO is a good starting point for implementing LCC

especially in SMEs, but LCC offers more . . .

Further
Further
opportunities
opportunities

• track other life cycle costs;

 e.g. inefficient resource-
use
• improve product design,
investment decisions etc.
 E xa m p le
Life Cycle Costing
Further Opportunities

Investment
Investment costs
costs
++Capital
Capitalreplacement
replacement costs
costs
-- Residual
Residualvalue
value
++Disposal
Disposalcosts
costs
++Energy
EnergyandandWater
Water costs
costs
++Non-fuel
Non-fueloperating,
operating, maintenance
maintenanceand
and repair
repair costs
costs
++other
other costs
costs i
i

Life
Life cycle
cycle costs
costs
All
Allcosts
costsare
arediscounted
discounted
 Tip s
Life Cycle Costing
Tips for Action!

• It is not necessary to undertake

a detailed material and energy
flow analysis at the very
beginning.
•
• To become familiar with LCC you
may first choose one type of
NPO and figure out how LCC
works.
•
• Start with the most beneficial
NPO flow(s).
Life Cycle Management Navigator: 12_PR_LCC
