Life Cycle Costing
Life-cycle cost (LCC) or also known as whole-life cost refers to the total cost of ownership over the life of a product. LCC commonly referred to as "cradle to grave" or "womb to tomb" costs. The costs considered include the financial cost which is relatively simple to calculate and also the environmental and social costs which are more difficult to quantify and assign numerical values. According to Business Dictionary, life cycle costing is a procurement and production costing technique that considers all life cycle costs. In procurement, it aims to determine the lowest cost of ownership of a fixed asset during the asset's economic life. In manufacturing, it aims to estimate not only the production costs but also how much revenue a product will generate and what expenses will be incurred at each stage of the value chain during the product's estimated life cycle duration. Life cycle costing estimates and accumulates costs over a products entire life cycle in order to determine whether the profits earned during the manufacturing phase will cover the costs incurred during the pre-and post-manufacturing stages. The objective is to determine whether costs incurred at different stages of development, manufacturing and marketing of the product will be recovered by revenue to be generated by the product over its life cycle. Particularly it helps to evaluate the viability of the product, decides on pricing of the product at different stages of product life cycle and often helps to estimate the value of the product to its user. Life cycle costing becomes an important tool for cost management when it is used in conjunction with target costing. This can be achieved by effectively exercised during the planning and design stage and not at the manufacturing stage when the product design and processes have already been determined and costs have been committed. Identifying the costs incurred during the different stages of a product’s life cycle provides an insight into understanding and managing the total costs incurred throughout its life cycle. In particular, 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. There are two important aspects of life cycle costing: it focuses on the product cost and the inclusion of upstream and downstream costs. Upstream costs involved in producing a good include research and development costs such as salaries paid to research engineers. It also includes costs associated with developing the product such as engineering costs. These costs that are incurred earlier in the production cycle should be taken into account to present a true picture of a product’s cost. On the other hand, downstream costs are incurred later in the product life cycle. These include marketing and advertising costs. Distribution costs such as shipping and cost of truck rentals also fall into this category. There are also downstream costs associated with customer service such as costs of maintaining a call centre. There are four stages of product life cycle:
1. Product planning and initial concept design
2. Product design and development
4. Distribution and customer support
However, the length of a product’s life cycle varies from one product to another. For example a clothing or fashion line product tends to have a life cycle of one year or less. Whereas for a automobile industry product, it tends to have a life cycle of four to five years before introducing a new model. Life Cycle Budget
Life cycle budget can be used to compare planned costs with predicted revenue over each year of the product’s life. An annual budgeting and performance report will be a medium to foreseen the actual costs and revenues each year over the product’s life cycle in order to compare them with the planned outcomes. The example of life cycle budget is as follows:...
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