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Advanced Costing Methods

Lifecycle costing

A product's costs are not evenly spread through its life.

 Traditional costing techniques based around annual periods may give a
misleading impression of the costs and profitability of a product. This is because
systems are based on the financial accounting year, and dissect the product's
lifecycle into a series of annual sections.

 Usually, therefore, the management accounting systems would assess a
product's profitability on a periodic basis, rather than over its entire life.

Lifecycle costing, however, tracks and accumulates costs and revenues attributable
to each product over its entire product lifecycle. Then, the total profitability of any
given product can be determined.

Lifecycle cost of Product A = Total costs of Product A over its entire lifecycle
Total number of units of A

 About 90% of a product's lifecycle costs are determined by decisions made
early in the cycle. In many industries, a large fraction of the life-cycle costs
consists of costs incurred on product design, prototyping, programming,
process design and equipment acquisition.

 This had created a need to ensure that the tightest controls are at the design
stage, i.e. before a launch, because most costs are committed, or 'lockedin', at
this point in time.

 Management Accounting systems should therefore be developed that aid the
planning and control of product lifecycle costs and monitor spending and
commitments at the early stages of a product's life cycle.

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