Life Cycle Costs Defined

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Life Cycle Costs Defined

• The maintenance of physical asset cost records
  over the entire asset lives, so that decisions
  concerning the acquisition, use or disposal of
  the asset can be made in a way that achieves the
  optimum asset usage at the lowest possible cost
  to the entity.
• The term may be applied to the profiling of cost
  over a products life, including the
  pre-production stage (terotechnology) and to both
  company and industry life cycles.
• CIMA Official Terminology

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Life Cycle Costs

• Life cycle costs are incurred for products and
  services from their design stage through
  development to market launch, production and
  sales and their eventual withdrawal from the
  market.

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Life Cycle Costs
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Life Cycle Costs

• Berliner Brimson 1988, allege over 90 of the
  products life cycle cost is determined by
  decisions early within the cycle.
• Cost Management for Today's Advanced
  Manufacturing
• A large proportion of costs are incurred on
  product design, prototyping, programming process
  design, and equipment acquisition.
• E.g General Motors and the Omega

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Life Cycle Costs

• Traditional absorption costing systems in general
  report costs at the physical production stage of
  the life cycle.
• They do not accumulate costs over the entire life
  of the product.

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Life Cycle Costs

• Whereas life cycle costs tracks and accumulates
  actual costs and revenues attributable to each
  product over the entire lifetime.
• Hence, the total profitability of any given
  product can be determined
• More accurate feedback is available on the
  organisations success or failure in developing
  new products.

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Life Cycle Costs

• An example to manage the products cash flows.
• Hewlett Packard developed a return map in order
  to minimise the time to market and to maximise
  the return over the products life cycle.
• Focuses employees on the issue of developing
  products that maximise profits in the shortest
  time. (see handout)

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Customer life cycle costing

• Research has shown the longer a customer stays
  with an organisation the more profitable that
  customer becomes.
• The initial set up costs are recouped e.g. credit
  card or insurance companies.
• Thus it is important to retain customers
• The plateau of profit growth for a customer base
  exists
• Customers profitability categories are set up
  e.g. the banks