Life Cycle Costing (1) Flashcards
What is life cycle costing?
The accumulation of costs over a product’s entire life
WHat does life cycle costing aim to do?
Cost a produce, service, customer, project over its entire life cycle with the aim of maximising the return over total life while minimising costs
What does product life cycle costing consider?
All costs incurred from design to abandonment of a new product and compares these to revenues that can be generated from selliing the product at different stages
Development stage on product life cycle?
Sales volume: None
Costs: Research and development
Introduction stage on product life cycle?
Sales volume: Very low levels
Costs: Very high fixed costs (e.g. non-current assets)
Growth stage on product life cycle?
Sales volume: Rapid increase
Costs: Increase in variable costs, some fixed costs increase (e.g. number of factories)
Maturity stage on product life cycle?
Sales volume: Stable, high volume
Costs: Primarily variable costs
Declining stage on product life cycle?
Sales volume: Falling demand
Costs: Primarily variable costs (now decreasing), some fixed costs (decommissioning costs)
Example of research and development costs?
Design cost
Cost of making a prototype
Tersting costs
Production process and equipment
Example of the cost of purchasing any technical data required?
Purchasing the right from another organisation to use a patent
Exmaple of training costs?
Including intiial operator training and skills updating
Example of production costs?
When product is eventually launched in the market
Example of distribution costs?
Includes transportation and handling costs
Example of marketing and advertising costs?
Customer service
Field maintenance
Brand promotion
Example of inventory costs?
Spare parts
Warehousing
Example of retirement and disposal costs?
Costs occurring at end of a product’s life
What costs vary each year due to production and sales volumes?
Production costs
What is a once-only cost?
Design costs
What are traditional cost accumulation systems based on?
The financial accounting year and tend to dissect a product’s life cycle into a series of 12-month periods
Features of a traditional cost accumulation systems?
Don;t accumulate costs over a product’s entire life cuycle and do not therefore assess a product’s profitability over it’s entire life.
How do traditional cost accumulation systems assess a product’s profitability?
They do it on a periodic basis
How does life cycle costing differ from traditional cost accumulation systems?
Tracks and accumulates actual costs and revenues attributable to each product over the entire product life cycle
