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So far, we have come across accounting systems which report costs and revenue by splitting them into timeperiods such as a month, a year, etc. This prevents consideration of the total profitability of an individualproduct or any other cost object and therefore does not allow the full picture to be seen.‘Life-cycle costing’, on the contrary, traces all costs and revenue of a cost object (i.e., a product or service) fromthe stage of product planning to after sales service and ultimate abandonment and disposal (i.e., the periodfrom ‘Cradle to Grave’). This Study Guide will help learners to understand the cost consequences of developing and manufacturing aproduct and to identify areas in which cost reduction efforts are likely to be most effective during the entireproduct life-cycle. You need to understand the concept of ‘life-cycle costing’ so that, as management accountants, you can findout and inform management whether the profits earned by a product during the manufacturing stage will beable to cover the costs incurred during the pre-manufacturing (development, design, etc.) and post-manufacturing stage (after sales service, product support, etc.) or not.
 A  A  A 333 
a)
 
Identify the costs involved at different stages of the life-cycleb)
 
Explain the implications of life-cycle costing on pricing, performance management and decision-making
 
 A3.2: Specific Cost And Management Accounting Techniques ©GTG
Introduction
Let us look at an example to understand the concept of life-cycle costing. ‘Easy -accounting’ is an accountingsoftware package which has a six year product life-cycle. The following are the year-wise costs estimatedduring its life-cycle:
Cost Items Year 1 Year 2 Year 3 Year 4 Year 5 Year 6$ $ $ $ $ $
Research & Development costs 280,000Design costs 125,000Production costs 115,000 202,000 85,000Marketing costs 150,000 210,000 135,000 50,000Distribution costs 12,000 20,000 8,500 5,000Customer-service costs 5,000 20,000 45,000 55,000 The life-cycle costs for the ‘Easy-accounting’ package are as follows:
Life-cycle costs $
Research & Development costs 280,000Design costs 125,000Production costs 402,000Marketing costs 545,000Distribution costs 45,500Customer-service costs 125,000
 Total Life-cycle costs 1,522,500
It clearly takes into consideration the costs of the package incurred during the entire life-cycle. Accordingly, fromlife-cycle costing, the management can know whether the revenue earned by the product is sufficient to cover the whole costs incurred during its life-cycle.When viewed as a whole, there are opportunities for cost reduction and minimisation (and thereby scope for profit maximisation) whereas these are unlikely to be found when management focuses on maximising profit on a period–by-period basis.In this Study Guide, we will find out about the costs involved at different stages of the life-cycle and theimplications of life-cycle costing on pricing, performance management and decision-making.
1.
 
Identify the costs involved at different stages of the life-cycle[Learning outcome a]
 The term
‘life-cycle costing’
encompasses both the concepts of ‘
product life-cycle cost 
’ and
‘customer life-cycle cost’
.
1.1
 
Conceptualising ‘product life-cycle’
 The term ‘product life-cycle’ refers to the succession of stages a product goes through. It is claimed that every product has a life-cycle. It is launched; it grows and may, at some point of time, die. The progression of aproduct through these stages is however, not certain. Some products seem to stay in one stage forever (e.g.milk).
 
© GTG Life-Cycle Costing: A3.3
 A product life-cycle may be classified into three broad stages. Each of the stages include at least one of thebusiness functions namely, Research and Development, Design, Production, Marketing, Distribution andCustomer service. The stages of a life-cycle are:
1.
 
 The planning and design stage.
 This stage includes the following business functions:
 
a)
 
Research and Development b)
 
Design
2.
 
 The manufacturing and sales stage.
 This stage includes the following business functions:
 
a)
 
Productionb)
 
Marketingc)
 
Distribution
3.
 
 The service and abandonment stage.
 This stage includes the following business functions:
 
a)
 
 After sales serviceb)
 
Disposal of production facility 
Diagram 1: Identify the business functions involved at different stages of a product life-cycle1.2
 
Costs committed and costs incurred
1.
 
 The costs that have not yet been incurred but will be incurred in the future on the basis of decisions that have already been taken are termed
committed costs
.Studies show that about 80% of the life-cycle costs of a product are committed at its planning and designstage. It is difficult to significantly alter costs after they have been committed.
Example
  The planning and design stage of a product determines its material and labour inputs and the productionprocess. At this stage, costs become committed and broadly determine the future costs that will be incurredduring the manufacturing stage.2.
 
Costs are incurred when a resource is used or sacrificed. The actual cost of a product is built up mostly inthe manufacturing stage and in the service and abandonment stage. Costs incurred vis-à-vis the costscommitted at different stages of the product life-cycle are compared in the following diagram:
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