Product Life Cycle Costing / Whole Life Cycle Costing /life Cycle Costing

PRODUCT LIFE
CYCLE COSTING /
WHOLE LIFE CYCLE COSTING /LIFE CYCLE COSTING
Life Cycle Costing is the accumulation of costs for
activities that occurs over entire life cycle of a product
from the inception to the abandonment by the
manufacturer and consumer.
It focuses on total cost over the products life including
design, development, acquisition, operation,
maintenance and servicing. Service costs include
marketing, distribution, administration and after-sales
service costs.
TC=DM+DL+DE+PRODUCTION
OVERHEADS+NON MANUFACTURING COST
Product Life Cycle
First referenced in the 1920s, the product life cycle

applies biological knowledge to products. In nature, a
seed is planted begins to sprout, becomes an adult
then eventually withers away and dies. Life cycle
focuses on introduction (seed), growth (sprout),
maturity (tree) and decline (death) phases.
Each phase has its own marketing mix strategy and
implications regarding product, price, distribution and
promotion.
The life cycle refers to the period from the product’s
first launch into the market until its final withdrawal
and it is split up in phases. During this period
significant changes are made in the way that the
product is behaving into the market i.e. its reflection
in respect of sales to the company that introduced it
into the market.
Five stages of a product life cycle
Introduction.
Growth.
Maturity.
Saturation
Decline.
Introduction:
The product is new to the market, few potential

consumers know of its existence. Price can be high,
(for example new computer games) and sales may be
restricted to early adopters (those consumers that
must have new technology, gadgets, or fashions first).
Profits are often low or losses are being made, this is
because development costs have to be repaid, and
advertising expenditure .
Growth
 The product is becoming more widely known and

consumed. Marketing is used to try to establish or
strengthen the brand and develop an image for the
product. Profits may start to be earned, but advertising
expenditure is still high. Prices may fall as the first
competitors enter the market.
Maturity
 The product range may be extended, by adding both

width and depth. Competitions will increase and this
has to be responded to. Advertising should be used to
rein-force the images of the product in the consumer’s
minds. Sales are at their peak, profits should be high.
Saturation
Very few new customers are gained, replacement
purchases are the trend. Firms should try to reduce
their costs, so that pricing strategies can be more
flexible. Brand image should be maintained, and in so
doing full value is taken from the brand. Alternatively
the brand can move down market, capturing new
markets, or market niches, but this should not be done
at the expense of quality. Profits may be maintained,
but can start to fall.
Decline
Sales can now fall fast, and as a result the range sold is
likely to be reduced, with the firm concentrating on
core products. Advertising costs will be reduced, and
attempts will be made to mop-up what is left of the
potential market. Each product sold could be quite
profitable as development costs have been paid back at
an earlier stage in the life cycle. But overall, total
profits will fall. Price is also likely to fall, but by
concentrating on remaining market niches there
should be some price stability.
Life cycle cost Stages
Cost of a product or asset over its useful life can be

categorized into 3 namely
Acquisition costs
This represents the first stage of costs and covers set
up costs or market entry costs.
Acquisition /setup costs are mainly’ one-off’, or are
once –off capital expenditure and once off only costs
such as cost of training staff ,establishing systems of
documentation and performance report. It should also
be noted that end –of –life costs are also once –off
costs that is they occur just once.
Operational costs or running costs
These are costs incurred throughout the life of the
asset or product. Examples of such costs are repairs
and maintenance, advertising e.t.c. Running costs and
operational costs are regular and recurring annual
costs throughout the life of the product or asset.
End of life costs
Costs incurred to withdraw a product from the market
or to demolish the asset after its use full life.
Example 1
The following relates to a new product that has been
finished and is about to be launched.
Time period R&D launch growth maturity decline
R and d cost 20m

Material cost 5m 4m 3m 0.9
other Production 1 0.9 0.8 0.9
cost/unit
Production 1m 5m 10m 4m
volume
The launch price is proving to be a contentious issue
between managers. the marketing manager is keen to
start with a low price of around $8 to gain new buyers
and achieve target market share.
The accountant is concerned that this does not cover
cost during the phase of launching and has produced
the following schedule
Amortised R&D cost (20/4) 5m
Material cost 5m
Production cost (1m x1/unit) 1m
Total cost 11m
Total production in units 1m

Cost per unit $11
required
Prepare a revised cost per unit schedule looking at
whole life costing and comment
SOLUTION
Total Life cycle cost for product x
Direct material (5m+4m+3+0.9) $12.9m
Other production cost: (1m+4m+8m+3.6m) $17.1m
Research &development $20m
Total life cycle cost $50m
Total units produced 20m
Cost per unit ($50m/20m units) $2.50
Implications of whole life cycle costing
Pricing
Pricing decisions ca be based on total life cycle costing
rather than simply the cost for the current period.
Decision making
In deciding to produce a product. time table of life
cycle cost helps to show what cost to be allocated to a
product.
If all cost cannot be covered, it will be wise not to
produce the product.
The end
Thank you

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PRODUCT LIFE

First referenced in the 1920s, the product life cycle

The product is new to the market, few potential

 The product is becoming more widely known and

 The product range may be extended, by adding both

Cost of a product or asset over its useful life can be

R and d cost 20m

Total production in units 1m

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