1) What does the term sales life cycle mean?

What are the phases of the sales

life cycle? How does it differ from the cost life cycle?
The term sales life cycle refers to the stages that a potential customer goes through
before making a purchase. It describes the entire process from the initial stage of
discovering a product or service to the final stage of making the purchase decision.
Sales life cycle is in terms of company’s perspective. It is can be defined as a product
life cycle. It focusses on the phases of product sold in the market which is looking at
the production stage. The product life cycle is a marketing concept that describes the
stages a product goes through from its introduction to the market to its decline and
eventual discontinuation.
Cost life cycle is carried out from the perspective of manufacturer. Cost related
activities starting from development, production, distribution, marketing,
abandonment, for sales activities, e-commissioning.
Five common phases of the sales (Product) life cycle:
i. Introduction: During this stage, a new product is launched in the market. The
main goal of the company is to create awareness about the product among
customers and gain market share
ii. Growth: During the growth stage, sales of the product start to increase
rapidly. The company is able to gain market share and increase profits. The
company may also face increased competition from other companies looking
to enter the market.
iii. Maturity: During the maturity stage, sales growth starts to slow down as the
market becomes saturated. The competition becomes more intense, and
companies may start to compete on price to maintain their market share.
iv. Decline: During the decline stage, sales of the product start to decline as the
product becomes outdated or replaced by newer products. The company may
reduce its marketing and advertising efforts and may even consider
discontinuing the product.
Differences between Sales (product) life cycle and Cost life cycle:
- The product life cycle and the cost life cycle differ from the perspective of
manufacturers in the following ways:
- The product life cycle reflects the stages that a product goes through from its
conception to its withdrawal from the market, while the cost life cycle reflects
the costs associated with each stage of the product life cycle¹.
- The product life cycle is influenced by external factors such as customer
demand, competition, and market conditions, while the cost life cycle is
influenced by internal factors such as efficiency, quality, and innovation².
- The product life cycle is usually longer than the cost life cycle, as costs tend to
decrease over time due to economies of scale, learning curve effects, and
technological improvements, while sales tend to peak and decline over time
due to market saturation, obsolescence, and substitution².
- The product life cycle helps manufacturers decide when to launch new
products, modify existing products, or withdraw products from the market,
while the cost life cycle helps manufacturers optimize their production
processes, reduce waste, and increase profitability³.
Alternative Answer:
Sales life cycle is applied in the sale of a product from introduction to removal from
the market while life cycle costing is applied all throughout the manufacturing
process of a product from R&D up to distribution.
OR
Sales life cycle is the sequence of phases in the product’s or service’s life in the
market, from the introduction of the product or service to growth in sales and finally
maturity, decline and withdrawal from the market. While life cycle costing is a
management technique used to identify and monitor the costs of product or service
throughout its life cycle.

2) What is life-cycle costing? Why is it used?

**Traditional costing - only consider manufacturing activities, cost of development,
planning, design, marketing, distribution, R&D, not consider as product cost
(consider as period cost)

Life-cycle costing (LCC) is a way of calculating the total cost of something over its
entire life, from when it's first bought to when it's disposed of. This includes not only
the initial cost of buying it, but also the costs of using it, maintaining it, repairing it,
and eventually getting rid of it. By looking at all of these costs together, we can get a
better idea of how much something will really cost us in the long run, and make more
informed decisions about what to buy and how to use it. Product cost only incur in
production stage. Other cost such as design cost, R&D cost is period cost.
LCC is said to focus primarily on capital or fixed assets (Ellram, 1995). Asiedu and
Gu (1998) on the other hand state that LCC can be used for all sorts of
products: The purpose and nature of the analysis however depends on the product.
However, LCC was originally designed for procurement purposes in the US
Department of Defence (White and Ostwald, 1976).

Life-cycle costing is used for several reasons / Advantages of LCC:

i. LCC is a cost management technique which also known as cost reduction
method. This management approach is done at the stage that can optimize the
cost reduction, which is planning and design stage/product development stage
that involve choosing material to be used, R&D.
ii. For example, it helps business to choose low price material without affecting
quality.

iii. Decision-making: Life-cycle costing looks at all the costs that will be
involved in owning and using something over its entire life, not just the
purchase price. This helps businesses make better decisions because they can
see how much something will really cost them in the long run. It can help
 business to compare which products generate more profit and decide when to
generate new product, modified existing products or withdraw products from
market.
iv. Performance evaluation: Life-cycle costing provides a comprehensive view
of costs, enabling organizations to evaluate the performance and cost-
effectiveness of their assets or products over time.
v. Budgeting and planning: It aids in creating accurate budgets and financial
plans by accounting for all relevant costs associated with an asset or product
over its lifespan.
vi. Risk management: By considering the entire life cycle, including potential
maintenance and repair costs, life-cycle costing helps in assessing and
mitigating risks associated
vii. LCC estimates and accumulates costs over a product’s entire life cycle to
determine whether the profits earned during the manufacturing phase will
cover the costs incurred during the pre and post-manufacturing stages.
viii. LCC enables the company to plan effectively and cut costs along the way. It is
used by businesses that are involved in long-term planning. LCC enables
businesses to make better decisions with regard to their investments.

Life-cycle costing is the sum of all funds expended in support of the item from its
conception and fabrication through its operation to the end of its useful life. It was
originally designed for procurement purposes in the US Department of Defence and
is still used most commonly in the military sector as well as in the construction
industry. LCC is said to focus on capital or fixed assets while it can also used for all
sorts of products. Many of the most prominent LCC methods are intended to be used
to support design decision making, but nevertheless from a client’s perspective.
A useful frame of reference detailing LCC purposes that accounts for both client and
supplier perspectives is presented in (Barringer and Weber, 1996):
- Affordability studies. Measure the impact of a system or project’s LCC on
long-term budgets and operating results.
- Source selection studies. Compare estimated LCC among competing
systems or suppliers of goods and services.
- Design trade-offs. Influence design aspects of plants and equipment that
directly impact LCC.
- Repair level analysis. Quantify maintenance demands and costs rather
than using rules of thumb such as “maintenance costs ought to be less
than _?_ percent of the capital cost of the equipment.”
- Warranty and repair costs. Suppliers of goods and services along with
end-users need to understand the cost of early failures in equipment
selection and use.
- Suppliers sales strategies. Can merge specific equipment grades with
general operating experience and end-user failure rates using LCC to sell
for best benefits rather than just selling on the attributes of low, first cost.
 3) Explain the concept of ‘committed costs’ in life-cycle costing

Committed cost is a locked in cost, when the cost locked in cannot alter anymore.
Committed costs / locked-in costs are those costs that have not been incurred but that
will be incurred in the future on the basis of decisions that have already been made.
Costs are incurred when a resource is used or sacrificed. It is difficult to significantly
alter costs after they have been committed. For example, the product design
specifications determine a product’s 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. Majority of costs are incurred at
the manufacturing stage but they have already become locked-in at the planning and
design stage and are difficult to alter. If alter the committed cost, it will affect final
product.
In life-cycle costing, committed costs refer to the expenses that are incurred during
the initial stages of a product, which is the design stage and are difficult to change or
reverse once committed. These costs are typically associated with the design,
development, and planning phases and are incurred before the product or project
enters the production or operational phase. It is incurred at design stage and is very
crucial in development stage where committed cost higher than incurring cost.
Committed costs are costs that an organization incurs as a result of investments in
long-term assets or commitments to ongoing expenses. These costs are also known as
fixed costs or sunk costs and are typically not affected by short-term changes in
demand or production levels. In life-cycle costing, committed costs are an important
consideration as they represent a significant portion of the total cost of ownership
over the life span of a product or asset.

Examples of committed costs include:

  Purchase price: The initial purchase price of a product or asset is a
committed cost and represents a significant portion of the total cost of
ownership.
 Maintenance and repair costs: Ongoing maintenance and repair costs are
committed costs that organizations must incur to keep a product or asset
functioning over its life span.
 Operating costs: Operating costs, such as energy and labor costs, are
committed costs that are required to keep a product or asset functioning.
 Disposal costs: Disposal costs, such as recycling or disposal fees, are
committed costs that must be incurred at the end of a product or asset's life
span.

4) Describe the steps involve in target costing.

Target cost is a cost management approach which also known as cost reduction
method. It is use in the first stage, the product development and planning stage.
i. Setting the target selling price.
This step involves determining the price at which the product will be sold in the
market. The price should be based on customer needs, competitive analysis, and the
company's strategic objectives. The target selling price is set during the new product
development (NPD) process. During the NPD process, market research/market survey
is conducted to determine what the customers want in terms of their desired product
features, specifications and functionalities, as well as the price they are prepared to
pay. In determining a realistic target selling price, the company takes into
consideration internal and external factors.
Business will design product, labor/material cost, then only bring the product to
market. Target cost is followed by market study to determine expected selling price of
the product. It is also used to determine profit margin by using estimated cost to
compare with target cost.
ii. Setting the target profit.
Once the target selling price is determined, the next step is to set the desired profit
margin for the product. This profit margin should be sufficient to cover all costs
associated with the product, as well as provide a return on investment. Profit margin is
used because selling price is identified. There are few ways to set target profits.
Businesses can refer to the actual profit margin of the predecessor product and making
some adjustment to cater to changes in market conditions. They can also derive target
profit from mid-term and long-term profit planning, which reflect a three- to five-year
period of the company’s business strategies.
iii. Setting the target cost.
Target cost is the differences between expected selling price and expected profit
margin. (expected selling price – expected profit margin) In setting the target cost,
maximum allowable cost is identified. Target cost represents the maximum allowable
cost for a company to produce a product while still achieving desired profit margin.
Maximum allowable cost is the cost at which the product must be manufactured to
gain the target profit when sold at its target selling price. Maximum allowable cost is
calculated by subtracting the target profit from the target selling price.
A cost gap occurs when estimated product cost is higher than the target cost. The
smaller the gap between the allowable cost and the target cost, the better. If estimated
product cost is higher than target cost, businesses should not proceed with the
production process. In this case, they need to reduce the estimated product cost to
close the cost gap. Besides, businesses should carry out value engineering where
businesses go back to planning stage using team work from various functions such as
r&d, production, maintaining to eliminate unnecessary costs or do the estimation of
cost that will be incurred.
iv. Compare the target cost with the estimated cost
Businesses have to compare target cost with estimated product cost (max allowable
cost). A cost gap occurs when estimated product cost is higher than the target cost.
The smaller the gap between the allowable cost and the target cost, the better. If
estimated product cost is higher than target cost, businesses should not proceed with
the production process. In this case, further cost reduction is required.
v. Reduce the estimated cost to close the gap
Continuous monitoring and reporting are conducted starting from target cost approval
until commercial production commences to ensure that the corrective actions are
taken before the actual cost exceeds the target cost. If the target cost is not being met,
cost improvement measures must be taken to bring costs in line with the target cost.
This can include further value engineering, process improvement, or renegotiation of
supplier contracts. This step is an ongoing process throughout the product lifecycle to
ensure that costs remain in line with the target cost. For example, businesses can
reduce the estimated product cost to close the cost gap. They can also close the gap
between the target cost and the quoted price of the suppliers. Besides, businesses can
carry out value engineering where businesses go back to planning stage getting team
work from various functions such as r&d, production, maintaining to eliminate
unnecessary costs or do the estimation of cost that can be removed.

FROM TC, Kaizen.Monden & Hamada,1991

Step 1 : Corporate Planning
In this step, the long and medium-term profit plans for the whole company are
established, and the overall target profit for each period is determined for each
product. A corporate plan is drafted by the corporate planning department. For
example in the engineering industry , new product development plans are drafted by
the engineering planning department and a general new product plan. In the plan, the
time frame of new product development, model changes and model modifications are
established for all cars.
Step 2 : Product Planning
In this step, the target cost for each product is determined based on the target profit
established in step one. The target cost is calculated by subtracting the desired profit
margin from the expected selling price. To the general new product plan, the product
planning department presents its wishes regarding the type of new product to be
developed and content of product changes based on market research. The product
manager later shape the plan and establishes the basic product plan.
In this stage, the cost management department estimates the costs of the plan and
investigates whether the plan can achieve the target profit.
Step 3 : Design and Development
In this step, the product design team works to develop a product that meets the target
cost established in step two. The team must find ways to reduce costs while
maintaining or improving product quality. The product manager requests each
department to review material requirements and the manufacturing process, and to
estimate costs.
The design department drafts a trial blueprint according to the target cost set for every
part. For this draft, information from each department is needed. The design
department also actually makes a trial of the product according to the blueprint and
the cost management department estimates the costs of the product.
Step 4 : Production and Sales
In this final step, production and sales teams work together to ensure that the product
can be produced at or below the target cost while still meeting customer needs and
generating profits for the company

5) Describe key principles of target costing

 Price-led costing: Target costing starts with the desired selling price of the
product, which is based on market research and analysis. The target cost is
then derived from this price, considering the profit margin required to make
the product profitable.
 Life cycle cost: Target costing takes into account the entire life cycle of the
product, from conception to disposal. It involves estimating all the costs
associated with each stage of the product life cycle, including development,
production, marketing, and disposal.
 Focus on customer: Target costing emphasizes meeting customer needs and
preferences. It involves analyzing customer requirements and feedback to
determine product features and specifications that are valued by customers.
 Cross-functional team: Target costing requires a cross-functional team
approach, involving representatives from all relevant functions such as design,
engineering, production, marketing, and finance. The team works together to
optimize product design, production processes, and costs.
  Focus on design: Target costing places a strong emphasis on product design.
The goal is to design products that meet customer needs and preferences,
while also minimizing costs. This involves identifying and eliminating non-
value-added features and processes, and finding ways to simplify and
streamline the product design.
 Value chain orientation: Target costing requires a focus on the entire value
chain, from suppliers to customers. It involves working closely with suppliers
to reduce costs and improve quality, and collaborating with distribution
partners to optimize logistics and distribution costs.

6) What does the concept of value engineering mean? How is it used in

target costing?
Value engineering is a systematic, interdisciplinary examination of factors affecting
the cost of a product with the aim of devising a means to achieve its specified purpose
at the required standards of quality and reliability and at an acceptable cost¹². It
involves analyzing the functions of the product and its components, and finding ways
to reduce costs without compromising performance, quality, or customer
satisfaction³⁴.
Value engineering is where businesses go back to planning stage using team work
from various functions such as r&d, production, maintaining to eliminate unnecessary
costs or do the estimation of cost can be removed. They need to identify value added
costs and non-value added cost. Value added cost is incurred in value added activities
which give value to final product and it is important to the product production.
Customer still willing to pay even the cost incurred result in a high selling price.
Example of value added costs is the cost to transform raw material. Non value added
cost is the cost that can be removed and it does not affect the final product. Businesses
will be able to identify the non-value costs incurred. Example of non-value added
costs are overhead, machine set-up time/ cost, material handling.
Value engineering is used in target costing to help achieve the target cost of a product
by focusing on product design and process improvement. It helps to identify and
eliminate unnecessary features, functions, or processes that do not add value to the
product or the customer³⁵. Value engineering also helps to find alternative solutions
that can provide the same or better value at a lower cost² ⁴. Value engineering is a key
tool for achieving cost reduction and value creation in target costing¹⁵.

7) Tan and Tin are starting a new business venture and are in the process of
evaluating their product lines. Information for one new product, leather
hand-made shoes, is as follows:
 Every six months a new shoe design will be put into production. Each
new design will require RM11,200 in setup costs.
 The shoes product line incurred RM48,000 in development costs and is
expected to be produced over the next six years.
  Direct costs of producing the shoes average RM144 each. Each pair of
shoes requires 12 labor-hours and 2 machine-hours.
 Indirect manufacturing costs are estimated at RM160,000 per year.
 Customer service expenses average RM16 per pair of shoes.
 Current sales are expected to be 2,000 pairs of each shoes design. Each
pair of shoes sells for RM224.
 Sales units equal production units each year.
Required:
a. What are the estimated life-cycle revenues?

Estimated life-cycle revenue

= (2,000 x 2) x RM224 x 6 years (cover the whole lifespan of the product)
= RM5,376,000

2,000 pairs of shoe design

2 designs a year (every 6 months new design), SP= RM224, 6 years

b. What is the estimated life-cycle operating income for the first year?

RM
Setup Costs 11,200 x 2 22,400
Development Costs 48,000/6 (DON’T DIVIDE 6, 48,000
development cost only in YEAR 1) (Development cost
from Year 2- Year 6 is 0)
Direct costs 144 x 4,000 576,000
Indirect manufacturing costs 160,000
Customer service expenses 16 x 4,000 64,000
Total expenses 870,400

Estimated life-cycle operating income for the first year

= Estimated life-cycle revenue for the first year- Estimated life-cycle cost
for the first year
= RM5,376,000/6 - RM870,400
= RM25,600
Additional question:
i. What is the operating income for year 2 – year 6?
Cost = 22,400 + 576,000 + 160,000 + 64,000 = 822,400
Operating Income = 896,000 – 822,400 = RM73,600
ii. Total operating income for the entire life cycle
= 25,600 + (73,600 x 5)
= RM393,600
 8) Xray Technologies manufactures hydraulic components for large
automated machine tools. Mr. Don, the Senior Manager for Marketing,
has concluded from his market analysis that sales are dwindling for one of
the firm's products main products, a hydraulic valve, because of
aggressive pricing by competitors. Xray's product sells for RM525
whereas the competition's comparable part is selling in the RM425 range.
Mr. Don has determined that a price drop to RM400 is necessary to
regain market share and annual sales of 1,000 units.
Cost data based on sales of 1,000 valves:
Budgeted Actual Amount Actual Cost
Amount
Direct Material 10,000 sq.ft. 11,000 sq.ft. $55,800
(sheet metal)
Direct Labor 4,600 hrs 5,200 hrs 155,000
Machine Setups 2,500 hrs 3,000 hrs 95,000
Mechanical 3,000 hrs 4,000 hrs 140,000
Assembly

Required:
i. Calculate the current cost and profit per unit.

Current Cost = (55,800 + 155,000 + 95,000 + 140,000) / 1,000 units

= RM445.80 per unit

Profit per Unit = RM525 – RM445.80

= RM79.20 per unit

ii. How much of the current cost per unit is attributable to non-value added
activities?

Current Cost = 95,000 / 1,000

= RM95

 Mechanical Assembly = assembly line process – main manufacturing

process, is value added
 Machine setup is non-value added because it is just a preparation to enable
machine to operate
 Things that can be avoided for machine setups: time taken to set up
machine (the longer the time take to setup, the more cost incurred)

iii. Calculate the new target cost per unit for a sales price of RM400 if the
profit per unit is maintained.

Target Cost per unit = Target Selling Price per unit – Target Profit Margin per unit
 = RM400 – RM79.20
= RM320.80

iv. What strategy do you suggest for Xray Technologies to attain the target
cost calculated in 3?

In order to attain the target cost calculated in (c), it is suggested to Sunshine to reduce
the cost to = RM445.80 – RM320.80 = RM125 (COST GAP)
Or
Even when reducing non-value added RM95, then it achieves RM350.80 [(55,800 +
155,000 + 140,000) / 1,000] still cannot achieve RM320.80. Sunshine is suggested to
reduce inefficiency in using DM, DL, mechanical assembly to achieve target costs.
OR Reduce non-value added cost: Reduce machine setup costs (but not possible to
reduce all the machine setup cost) / Reduce hour use from machine assembly

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