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Concept behind Product life cycle costing:

Definition: Product life cycle (PLC) is the cycle through which every product goes
through from introduction to withdrawal or eventual demise.

Product lifecycle costing is the accumulation of a product’s costs over its whole life,
from inception to abandonment.

Description: The stages of PLC are:

i. Introduction: When the product is brought into the market. In this stage,
there's heavy marketing activity, product promotion and the product is put into
limited outlets in a few channels for distribution. Sales take off slowly in this
stage. The need is to create awareness, not profits.
ii. Growth: In this stage, sales take off, the market knows of the product; other
companies are attracted, profits begin to come in and market shares stabilize.
iii. Maturity: It is a stage where sales grow at slowing rates and finally stabilize.
In this stage, products get differentiated, price wars and sales promotion
become common and a few weaker players exit.
iv. Decline: Here, sales drop, as consumers may have changed, the product is no
longer relevant or useful. Price wars continue, several products are withdrawn
and cost control becomes the way out for most products in this stage.

When considering the profitability of the product portfolio and also planning a
new product, the management accountant should assess the profitability of
products over their whole lives. A product will typically accrue costs from a
variety of activities:

i. Research and development

ii. Design
iii. Manufacturing
iv. Marketing
v. Distribution

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 Significance of PLC: PLC analysis, if done properly, can alert a company as to
the health of the product in relation to the market it serves. PLC also forces a
continuous scan of the market and allows the company to take corrective action
faster. But the process is rarely easy.

2. Calculate profit using PLC Costing:

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3. Difference between Absorption Costing and PLC Costing:
Absorption costing values inventory at full production cost. In absorption costing,
both fixed & variable production costs are assigned to products. If inventory levels
increase, absorption costing gives the higher profit. Whereas product lifecycle

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compares initial investment options & identifies the least cost of all the phases in
whole life accumulate.

SOLUTION#02

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