LCC

what is life cycle costing

• technique that tracks all costs and revenues associated with a product over its entire life - from initial development to disposal/withdrawal

• traditional accounting → focuses on annual profits

• LCC → gives long term view of profitability

why use LCC

• helps identify total cost of ownership

• supports product profitability decisions over time

• useful for:

  • investment appraisal

  • pricing strategy

  • design decisions

  • product portfolio management

• LCC reveals the true economic impact of a product across its life, not just yr 1

stages of product life cycle

• products go through 4 key stages:

  • intro → high R&D and launch costs

  • growth → increasing sales, rising profits

  • maturity → stable sales, market saturation

  • decline → falling demand, end of life costs

    • option → product extension phase via redesign or repositioning

• profits often follow after sales, so early investment must be justified by long term gains

LCC categories

cost type	examples	when incurred
R&D	research, software development	before launch
design	product design, testing	before launch
manufacturing	production, material, labour	growth/maturity
marketing	advertising, promotion	all stages
distribution	logistics, delivery	all stages
customer service	help desk, warranties, returns	maturity decline
disposal/sustainability	end of life, compliance	decline, post use

LCC numerical

• calculate revenue → units x price over all yrs

• add up all life cycle costs across all yrs

• calculate total life cycle profit → revenue - total cost

• compute profit margin → profit/revenue

• rank products based on profit or margin

• analyse cost structure

how to analyse/comment on results

• profitability interpretation:

  • product X achieved the highest life cycle profit and margin of %, making it the most profitable over its lifespan

• ranking commentary:

  • based on total profits and margins, product Y ranks lowest → due to high upfront costs and limited sale

• cost structure insight:

  • product Z has disproportionately high customer service costs, suggesting post sale support is expensive and may reduce profitability

• strategic recommendation:

  • firm should prioritise prod. X and consider reducing service burden or support cost of prod. Z

strategic uses of LCC

use LCC to:

• understand true product profitability

• avoid launching high costs, low return products

• improve long term product design decisions

• maximise return over the full life span

• align R&D spending with future earnings potential

• monitor cost behaviour across stages

LCC vs. trad. costing

• LCC:

  • long term focus [full life]

  • all costs → cradle to grave

  • strategic decisions

• trad. costing:

  • short term [yearly reporting]

  • focus on current period

  • operational control

• TC may hide long term losses, LCC ensure we see full picture

advantages

• long term profitability view

• supports strategic pricing

• identifies high cost phases

• helps optimise product design

• encourages cost control early in development

• enables better investment appraisal

limitations

• data intensive - full cost tracking required

• uncertainty - future costs/revenues may change

• time consuming

• difficult to locate shared overheads

• may overlook intangible benefits [e.g. brand image]

• hard to apply for short term products