Life Cycle Costing

Life Cycle Costing

CAM-l defines life-cycle costing as ―the accumulation of costs for activities that occur over the entire life cycle of a product, from inception to abandonment by the manufacturer and the
customer.― Life-cycle analysis provides a framework for managing the cost and performance of a product over the duration of its life. The life-cycle commences with the initial identification of a consumer need and extends through planning, research, design, development, production, evaluation, use, logistics support in operation, retirement, and disposal.
Cost systems have focused primarily on the cost of physical production, without accumulating costs over the entire design, manufacture, market, and support cycle of a product. Resources
committed to the development of products and the manufacturing process represent a sizeable investment of capital. The benefits accrue over many years, and under conventional accounting, are not directly identified with the product being developed. They are treated instead as a period expense and allocated to all products. Even companies which use life-cycle models for planning and budgeting new products do not integrate these models into cost systems. It is important to provide feedback on planning, effectiveness and the impact of design decisions on operational and support costs. Period reporting hinders management‘s understanding of product-line profitability and the Potential cost impact of long-term decisions such as engineering design changes. Life-cycle costing and reporting provide management with a better picture of product profitability and help managers to gauge their planning activities.

Product Life Cycle Costing:

The cycle begins with the identification of new consumer need and the invention of a new product and is often followed by patent protection and further development to make it saleable.
This is usually followed by a rapid expansion in its sales as the product gains market acceptance. Then competitors enter the field with imitation and rival products and the distinctiveness of the new product starts diminishing. The speed of degeneration differs from product to product. The innovation of a new product and its degeneration into a common product is termed as the life cycle of a product‘.

Characteristics

The major characteristics of product life-cycle concept are as follows:
i. The products have finite lives and pass through the cycle of development, introduction, growth, maturity, decline and deletion at varying speeds.
ii. Product cost, revenue and profit patterns tend to follow predictable courses through the product life cycle. Profits first appear during the growth phase and after stabilizing during the maturity phase, decline thereafter to the point of deletion.
iii. Profit per unit varies as products move through their life cycles