LIFE-CYCLE COSTING (LCC)

A LCC system provides information for

managers to understand and manage costs
through a product’s design, development,
manufacturing, marketing, distribution,
maintenance, service, and disposal stages.
Features of life cycle costing

 The products have finite lives and pass through

the cycle of development, introduction, growth,
maturity, decline and deletion.
 Profit per unit varies as products move through
their life cycle.
 Each phase poses different threats and
opportunities that gives rise to different strategic
actions.
 Product cost, revenue and profit patterns tend to
follow predictable courses through the product
life cycle.
 Phases of product life
cycle
 Introduction phase
 Growth phase
 Maturity phase
 Saturation phase
 Decline phase
Introduction phase

To introduce a new product when

 Cost are high
 Sales revenue low
 Profits probably negative
( in this phase customers are innovators,
competition are almost negligible and profits
are non-existent)
Growth phase or expansion

Product will start to make a profit contribution

Under this phase-
 Sales and profits rise
 Competitors enter the market often in large
numbers
 As a result profits starts declining near the
end of the growth phase
Maturity phase or stability

This is usually the longest stage in the cycle

 Sales continue to increase but at a decreasing
rate
 Profits of both producers and middlemen
decline
 Intense price competition
 Firms extend their product lines with new
models
Saturation phase

Pressure is exerted for new product

 Sales and profits begin to fall
Decline phase

Sales begin to diminish as the customers begin

to tire of the product
 The need or demand for product disappears
 Availability of better and less costly
substitutes in the market
Various stages of
product life cycle
Market research

 What product the customer wants

 How much he is prepared to pay
 How many he will buy
specifications

 What is to be made
 Design specification will give such details as
required life, maximum permissible
maintenance cost, manufacturing cost, the
number required, delivery date etc.
Design

The designers can produce the process

schedules which defines the geometry of the
product and manufacturing process
Prototype manufacture

 From the design manufacture a small

number of product
 Prototypes will be used to develop the
product and to demonstrate that it meets the
requirements of the specifications
Development

 The period of testing and changing is

development.
 It can be very expensive and often generates
a large negative cash flows before any
product have been sold.
Tooling

 Building a production line costing several

lakhs of rupees
 Building expensive jigs
 Buying special purpose machine tools
 Making a very large initial investment
Manufacture

 Purchase of raw material

 Purchase of bought out components
 Use of labour to make and assemble the
product
 Use of supervisory labour
Selling

 When the product is fit to sell and available

It is necessary to spend money on a campaign
to sell the product
Distribution

 Distributed the product to sales outlets and

to customers
Product support

 The manufacturer or supplier will have to

make sure that spares and expert servicing
are available for the life of the product
 Offer free servicing and parts replacement
during the early life of the product.
Decommissioning or replacement

 When a manufacturing product comes to an

end the plant used to build the product must
be reused, sold , scrapped or
decommissioned in away that is acceptable
to the society.
LIFE-CYCLE COSTING

RD&E Manufacturing
Cycle Cycle

Post Service
Cycle
RD&E Cycle
The RD&E Cycle has three stages:
 Market research
 Emerging customer needs are assessed and ideas are
generated for new products
 Product design
 Scientists and engineers develop the technical aspects of
products
 Product development
 The company creates features critical to customer
satisfaction and designs prototypes, production processes,
and any special tooling required
 Cost Control in the RD&E
Cycle

 By some estimates, 80% to 85% of a product’s total life costs

are committed by decisions made in the RD&E cycle
 Committed costs are those that a company knows it will
have to incur at a future date
 Decisions made in this cycle are critical
 An additional dollar spent on activities that occur during
this cycle can save at least $8 to $10 on manufacturing
and post-manufacturing activities:
 Design changes
 Service costs
 Manufacturing Cycle

 After the RD&E cycle, the company begins the

manufacturing cycle
 Costs are incurred in the production of the product
 This is where product costing traditionally plays its
biggest role
 Usually at this stage there is not as much room for
engineering flexibility to influence product costs
and product design because they have been set in
the previous cycle
 Cost Control in the Manufacturing
Cycle
 Operations management methods help to reduce
manufacturing life-cycle product costs
 Facilities layout
 Just-in-time manufacturing
 Companies have begun to use management
accounting methods such as activity-based cost
management to identify and reduce non-value-added
activities in an effort to reduce costs in the
manufacturing cycle
Post-sale Service & Disposal
Cycle
 This cycle overlaps the manufacturing cycle
 The service cycle begins once the first unit of a
product is in the hands of the customer
 Disposal occurs at the end of a product’s life and lasts
until the customer retires the final unit of a product
 The costs for service and disposal are committed in
the RD&E stage
 The Service Cycle
 The service cycle typically consists of three stages:
 Rapid growth
 From the first time the product is shipped to the growth
stage of its sales
 Transition
 From the peak of sales to the peak in the service cycle
 Maturity
 From the peak in the service cycle to the time of the last
shipment made to a customer
 The Disposal Cycle

 Disposal occurs at the end of a product’s life and

lasts until the customer retires the final unit of a
product
 Disposal costs often include those associated with
eliminating any harmful effects associated with the
end of a product’s useful life
 Products whose disposal could involve harmful
effects to the environment, such as nuclear waste or
toxic chemicals, often incur very high costs
 Life-Cycle Costs
 The following table illustrates four types of products
and the percentage of life-cycle costs incurred in
each cycle
Combat Commercial Nuclear Computer
Jets Aircraft Missiles Software
RD&E 21% 20% 20% 75%*
Manufacturing 45% 40% 60% *
Service & Disposal 34% 40% 20% 25%
Average Years in
Life Cycle 30 25 2 to 25 5
* For computer software, RD&E and manufacturing are
often tied directly together
 Benefits of product life cycle
costing
 There are number of factors that need to
managed in order to maximize return on a
product
 Better decisions should follow from a more
accurate and realistic assessment of revenues
and costs during particular life cycle stage
 PLC promote long term rewarding in contrast
to short term profit rewarding
 It provides an overall framework for considering
total incremental costs over the entire life span
of a product.