Life cycle costing (LCC) is the process of accumulating all costs associated with an asset throughout its lifespan, including initial investments and ongoing operating costs, providing a comprehensive view of ownership costs. It facilitates better decision-making by analyzing costs and revenues at different stages, emphasizes both production and non-production costs, and helps optimize pricing and budgeting strategies. While LCC offers numerous benefits such as promoting long-term rewards and improving capital budgeting decisions, it is also considered costly, time-consuming, and may suffer from data accuracy issues.

1. LIFE CYCLE COSTING
By
B. KALPANA
ASSISYANT PTOFESSOR

2. INTRODUCTION
 Life cycle costing is the process of compiling all costs that the owner
or producer of an asset will incur over its lifespan. These costs
include the initial investment, future additional investments, and
annually recurring costs, minus any salvage value.
 Life cycle costing is a system that tracks and accumulates the actual
costs and revenues attributable to cost object from its invention to its
abandonment. Life cycle costing involves tracing cost and revenues
on a product by product base over several calendar periods.

3. The Life Cycle Cost (LCC) of an asset is
defined as:
 “The total cost throughout its life including planning, design, acquisition
and support costs and any other costs directly attributable to owning or
using the asset”.
 Life Cycle Cost (LCC) of an item represents the total cost of its ownership,
and includes all the cots that will be incurred during the life of the item to
acquire it, operate it, support it and finally dispose it. Life Cycle Costing
adds all the costs over their life period and enables an evaluation on a
common basis for the specified period (usually discounted costs are used).

4. Examples
 aircraft, computers,
 military systems,
 heavy industrial equipment,
 automobiles,
 hospital facilities,
 buildings, tractors,
 heat pumps,
 copying machines,
 air- conditioners,
 refrigerators,
 audio-visual equipment's,
 medical equipment's,
 diesel engines,
 electric items etc.

5. Characteristics of Life Cycle Costing
 Product life cycle costing involves tracing of costs and revenues of a product over several
calendar periods throughout its life cycle.
 Product life cycle costing traces research and design and development costs and total magnitude
of these costs for each individual product and compared with product revenue.
 Each phase of the product life-cycle poses different threats and opportunities that may require
different strategic actions.
 Product life cycle may be extended by finding new uses or users or by increasing the consumption
of the present users.

6. Phases of Life Cycle Costing
Introductio
n
Growth
Maturity Decline.

10. Benefits of Product Life Cycle
Costing
(i) It results in earlier action to generate revenue or lower costs than otherwise might be
considered. There are a number of factors that need to be managed in order to maximize return in
a product.
(ii) Better decision should follow from a more accurate and realistic assessment of revenues and
costs within a particular life cycle stage.
(iii) It can promote long term rewarding in contrast to short term rewarding.
(iv) It provides an overall framework for considering total incremental costs over the entire span
of a product.

11. Importance of Product Life Cycle Costing
 1. Time based analysis: Life cycle costing involves tracing of costs and revenues of
each product over several calendar periods throughout their life cycle. Costs and
revenues can be analyzed by time periods. The total magnitude of costs for each
individual product can be reported and compared with product revenues generated in
later periods.
 2. Overall Cost Analysis: Production costs are accounted and recognized by the
routine accounting system. However non-production costs like R&D, design,
marketing, distribution, customer service etc. are less visible on a product-by-product
basis. Product Life Cycle Costing focuses on recognizing both production and non-
production cost.

12. 5. Better Decision Making: Better decisions should follow from a more accurate and
realistic assessment of revenues and costs, at least within a particular life cycle stage.
 3. Pre-production Costs analysis: The development period for R&D and design is
long and costly. A high percentage of total product costs may be incurred before
commercial production begins. Hence, the company needs accurate information on
such costs for deciding whether to continue with the R&D or not.
 4. Effective Pricing Decisions: Pricing Decisions, in order to be effective, should
include market consideration on the one hand and cost considerations on the other.
Product Life Cycle Costing and Target Costing help analyze both these considerations
and arrive at optimal price decisions.

13. 6. Long Run Wholistic view: Product life cycle thinking can promote long-term
rewarding in contrast to short-term profitability rewarding. It provides an overall
framework for considering total incremental costs over the entire life span of a product,
which in turn facilitates analysis of parts of the whole where cost effectiveness might be
improved.
 7. Life Cycle Budgeting: Life Cycle Budgeting, i.e. Life Cycle Costing with
Target Costing principles, facilitates scope for cost reduction at the design
stage itself. The Company stands to benefit since costs are avoided before
they are committed or locked in.
 8. Review: Life Cycle Costing provides scope for analysis of long term picture
of product line profitability, feedback on the effectiveness of life cycle
planning and cost data to clarify the economic impact of alternatives chosen
in the design, engineering phase etc.

14. Advantages of Product Life Cycle Costing
Better
Decision
Important
Information
Capital
Budgeting
Decisions
Earlier
Action
Covering
Costs
Long Term
Reward
Total
Incremental
Costs

15. (1) Better Decision –
Within a particular life cycle stage, better decisions can be taken with the help of
accurate and realistic assessment of revenues and costs.
(2) Important Information –
It provides important information for taking better pricing decisions. In this
method, all costs during the life span of the product become the base for fixing
the price of the product.
(3) Capital Budgeting Decisions –
Life cycle costing is very much important in taking capital budgeting decisions
because it considers both capital costs as well as revenue costs which is related to
the product over its life time.

16. (4) Earlier Action –
Product life cycle costing provides the facilities of taking earlier actions for generating revenue and
to lower down the cost of the product. It provides chances to the manager to help and to prepare the
plans for generating revenue from the product.
(5) Covering Costs –
This costing covers costs relating to all activities of research and development, design,
marketing, manufacturing, distribution and service after sales etc.
(6) Long Term Reward –
Product life cycle costing can promote long term rewarding in place of short-term profitability.
(7) Total Incremental Costs –
This costing system provides an overall framework for considering total incremental costs over
the entire life span of a product.

17. Drawbacks of Life Cycle Costing
 (i) It is deemed to be costly;
 (ii) It is labelled as time consuming;
 (iii) Accuracy of data is doubted; and
 (iv) Collecting data for analysis is a tedious job.

18. THANK YOU