How desirable profitability can be achieved under Product Life Cycle Costing (LCC)?

 

Query no.1: What is product Life Cycle Costing?

Solution: LCC is a whole life costing of the product from the beginning to an end. It is an accumulation of all costs over the entire life of the product.

Query no.2: What is the aim and objective of product LCC?

Solution: The aim is to maximise return over the entire life of the product and objective is to minimise costs. This means that, Products that are not expected to be profitable after allowing for design & development costs or clean up costs should not be considered for commercial development. All costs related to a product including research & development are associated with the product. This enables true assessment of a product's profitability.

Query no.3: Why LCC is modern costing technique?

Solution: LCC is a modern costing technique because in the past, costs & revenues of a product are assessed on a financial year on year basis or period basis. But life cycle costing change this phenomenon since it tracks and accumulates actual costs & revenue attributable to each product over the entire product life cycle. 

Query no.4: How many stages, sales volume & costs in product LCC?

Solution: In a table below:

Stages	Sales Volume	Costs
Development	None	Research & development
Introduction	Very low level	Very high fixed cost i.e. non-current assets & advertisement
Growth	Rapid increase	Increase in variable cost some fixed cost may increase i.e. Increased no. of factories
Maturity	Stable	Primary variable cost
Decline	Falling	Primary variable cost (Now decreasing some fixed cost) i.e. Decommissioning cost

 

Query no.5: What type of costs spent in research & development costs?

Solution: Design cost, Cost of making a prototype, Testing costs, Production process and Equipment development & investment.

Query no.6: What other costs over product life cycle?

Solution: In the bullets below:

• Cost of purchasing any technical data required i.e. purchasing the right from another organisation to use a patent.
• Training costs. including initial operator training & skills updating.
• Production cost when product is eventually launched int he market.
• Distribution costs including transportation & handling costs.
• Marketing & Advertising i.e. Customer service, Field maintenance & Brand promotion.
• Inventory costs including  spare parts, warehousing & so on.
• Retirement & disposal costs i.e. costs occuring at the end of the product's life which may include costs of cleaning up a contaminated site.

Some of above costs such as design cost are once-only costs. Others would be incurred throughout the product's life but vary with production & sales volume.   

Query no.7: How to maximise return over the product life cycle?

Solution: In the bullets below:

• Design out cost of product: Approximately 70% to 90% costs can be determined by decision made early in the life cycle at the design & development stage.
• Minimise time to market: A company should get a product to the marketplace very quickly since it will give the product as long a span as possible without competitors' rival product in the market.and this mean that market share is increased in the long run.
• Minimise breakeven time: Pricing strategy can affect both contribution & volume generated. A short breakeven time is very important for liquidity purposes.
• Extend the length of the life cycle itself i.e. Product development, finding other uses of products or launch in the other relevant markets.

Query no.8: What are the implications to calculate LCC?

Solution: Looking at the product life cycle, It is clear that product will make a loss initially. Viewing profitability on a period basis can put unnecessary pressure on management because of the visibility of the loss which can lead to incorrect decision making.

It would not be appropriate to set one price for the product's entire life since there will be different level of demand for a product over its expected life.

Query no.9: What can be the advantages of LCC?

Solution: In the bullets below:

• It helps management to assess profitability over the entire life of a product which in turns helps management to decide whether to develop the product or continue making the product. 
• It can be very useful for organisations that continually develop products with a relatively short life, where it may be possible to estimate sales volume & prices with reasonable accuracy.
• The life cycle concept results in earlier actions to generate more revenue or lower costs.
• Better decision making should follow from more accurate & realistic assessment of revenues & costs at least with in a particular life cycle stage.
• It encourages longer-term thinking and forward-planning and may provide more useful information than traditional reports of historical costs & profits in each accounting period.