This is a presentation based on Product life Cycle Costing. This presentation is prepared with the help of books and internet resources. There are some example, mathematical calculation and also some case which is too much relevant to practice of Life Cycle Costing in the real world.

1. Prepared By
TANVIRUL ISLAM
RUKAIYA KADER
LIFE CYCLE COSTING

2. Life cycle costing is used predominately in the planning
phase and attempts to estimate the products cost over
lifetime
Planning
Phase
The
Manufacturing
Phase
Abandonment
Phase
Costing Tools for Decision Making

3. Costing Tools for Decision Making
Product Specification
Target Price
Target Profit
Target Cost
Major Product and Process
Design Changes
Estimate Life Cycle Cost
Does the
design meet
the target
cost?
Is projected
LCC
accepted?
Cont……
Product Planning
Phase
Target
Costing
NO
YES
YES
NO

4. Costing Tools for Decision Making
Put Product Into Production
Minor Product and Process
Design Changes
Product Abandonment
Kaizen Costing
Manufacturing
Stage
Abandonment
Phase
This chart describes a timeline from the initial planning for the product
to it’s eventual removal from the market

5. Target Costing and Kaizen Costing
“Target costing is used during the planning cycle and drives
the process of choosing product and process design”
“Kaizen costing focuses on identifying opportunities for cost
improvement during the manufacturing cycle”

6. Target Costing
Widely accepted rule is that 80% of a products costs are
committed during the product design stage
During this time, planners choose the product design and design
the process that organization will use to make the product
It’s a tool that promotes and facilitates communication among
the members of the cross functional team that is responsible for
product design
Target costing is customer oriented it begins with price quality
and functionality requirements defined by customers

7. Customer Orientation
Target costing is customer oriented.
Organizations increase customer value by increasing
products functionality while holding the price constant or by
reducing the price while holding functionality constant.
Two critical elements:
1. The customer or more generally, market defines the price
that will be paid for the product and it’s designated
functions.
2. To the extent that there is a market for the same product
with different functions.

8. Customer Orientation
Example
An automobile with different options, the
organization can choose which product
functions to supply but the maker or consumer
will choose a price that reflects the set of
product functions supplied

9. Manufacturing Stage
After RD&E stage company enters the manufacturing
stage in which it spend money on materials, labors,
machinery and indirect cost to produce and distribute
the product
This stage offer little opportunity for engineering
design to reduce product cost through re-design
decisions since most cost have already been
determined during the RD&E stage

10. Committed Cost and Incurred Cost
Stages of total life cycle Traditional
accounting
focus
$costs Research Development
$ Engineering Cycle
Manufacturing Post sale service
and disposal
100% COST COMMITED
80%
60%
40%
20% Cost Incurred
0%

11. Target Costing Process
Market
research
Define
customer
niche market
Understand
the customer
requirement
Define product
features
Market
Price
Required
profit
Competiti
ve
intelligen
ce

12. CROSS
FUNCTIONAL TEAM
FOCUS ON PRODUCT
DESIGN AND PROCESS
TC
PRINCIPLE
PRICE LED
COSTING
LCC
REDUCTION
VALUE CHAIN
ENVOLVEMENT
TARGET COSTING

13. IDENTIFYING
IMPROVED
PRODUCT
DEVELOPMENT
ELIMINATING
UNNECESSARY
FUNCTIONS
WHICH
INCREASE
COST
Two ways of Achieving TC

14. REENGINEERING
Main Focus
Redesigning
A planned or
existing process
Improvement
Products cost or
Quality attributes

15. Tear Down Analysis
Evalute
competetor
s product
Identify
opportuniti
es
Identify
Product
Functionali
ty and
design
IDENTIFY
THE COST
OF
PRODUCT
FIND OUT
THE
ADVANTA
GES &
DISADVAN
TAGES

16. VALUE ENGENEERING
EVALUTE PRODUCT DESIGN
IDENTIFY ALTERNATIVE

17. TWO WAYS TO
IMPROVE
HOLD
FUNCTIONALITY
CONSTANT TO
REDUCE VALUE
HOLD COST
CONSTANT TO
INCREASE
FUNCTIONALITY

18. Kaizen Costing
Focuses on reducing costs during manufacturing stage
Incremental improvement to current production process
Driven by periodic profitability targets set internally
Workers assumed to have superior knowledge about
process

19. Kaizen Costing
Goal of kaizen costing is to ensure that,
actual production costs are less than cost
base and make this possible through
giving responsibility and control to
workers

20. Kaizen
Costing
General
Kaizen
Direct Costs
Indirect
Costs
Item specific
Kaizen
Product
Specific
Component
Specific
Approaches of Kaizen Costing

21. Olympus Optical Company (Japan)
“Stylus Zoom” Camera
This camera was developed during a period of YEN appreciation,
that was placing considerable pressure on Olympus optical to
reduce cost. Due to YEN appreciation, selling price reduced and
caused fall in target cost.
To achieve target cost, value engineering was applied and
achieve aggressive cost reduction.

22. Value engineering was applied in three areas:
i. Number of parts in each unit was targeted for reduction.
ii. Expensive, labor intensive and mechanical adjustments
were eliminated where possible.
iii. Metal and glass components were replaced with less
expensive plastic ones where appropriate.
Olympus Optical Company (Japan)

23. Olympus Optical Company (Japan)
During trial production, cost of Stylus Zoom was found about
10% above target. Under normal condition, it is better to
abandon the project. But the new Stylus was viewed as a
“flagship” product and was therefore protected from
cancellation.

24. Reduce number of parts Manage suppliers cost
Transfer production to
oversees , where overall
cost was lower
Replace more expensive
parts with less
expensive parts
Olympus Optical Company (Japan)
window of product specific kaizen costing can reduce cost in
4 major ways:

25. Olympus Optical Company (Japan)
Olympus also adopted general kaizen costing approach. which
analyze production process instead of the product itself.
Olympus focused on removing material, labor and some overhead
from the products, like: selling, general and administrative cost. To
achieve this, they empowered workforce to find ways.
Widespread application of Kaizen costing makes this method a
systematic cost management technique at Olympus Optical.

26. LIFE CYCLE
COSTING
Life Cycle Costing is the process of estimating and
accumulating costs over a product’s entire life.

28. “From Cradle To The Grave…”
Research ,Development
and Engineering Cycle
Manufacturing Cycle
Post Sale Service and
Disposal Cycle
Total Life Cycle Costing

29. Determi
ne time
for each
cost
element
Estimate
value of
each cost
element
Calculate
present
value of
each cost
element for
every year
Calculate
LCC ,by
adding each
cost element
costs at
every year
Analyze
the
results
STEPS TO CALCULATE
LCC

30. LIFE CYCLE COSTS FUEL CAR ELECTRIC CAR
Purchase price $17000 $29000
Fuel usage (miles per gallon) 24 126
Annual fuel costs $3125 $595
Average maintenance costs $250 $200
Salvage Value $8000 $10000
Insurance per year $950 $800
Tax rebate $0 $7500

31. Miles driven per year 25000
Average price per
gallon
3
Discount rate 10%
Inflation rate 3.5%
AFTER CONSIDERING LIFE CYCLE
COST IN WHICH CAR COMPANY
SHOULD INVEST?

32. FUEL CAR LCC
FUEL CAR YEAR 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR
5
Purchase price $17000
Fuel Costs $3234 $3348 $3465 $3586 $3712
Maintenance cost 259 267 277 287 297
Insurance cost 983 1017 1053 1090 1128
Total O&M costs 4476 4632 4795 4963 5137
Tax Rebate
Salvage Value ($8000)
Annual Cash flows $17000 $4476 $4632 $4795 $4963 ($2863)
PV ($17000) ($4069) ($4211) ($4359) ($4511) $2602
LCC 31548

33. ELECTRIC CAR LCC
Electric car Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Acquisition costs $29000
Fuel costs $616 $637 $660 $682 $707
Maintenance cost 207 214 222 230 238
Insurance costs 828 857 887 918 950
Total o & m costs 1651 1708 1769 1830 1887
Tax rebate (7763)
Salvage value ($10000)
Annual cash flows $29000 ($6112) $1708 $1769 $1830 ($8113)
Pv ($29000) $5556 ($1552) ($1608) ($1663) $7375
LCC 20892

34. LCC ANALYSIS AND DECISION
Fuel Car LCC $31548
Electric Car LCC $20829
Thus , all other factors being equal , the company will prefer
investing in Electric Car rather than Fuel Car ,
Because LLC of electric car are lower.

35. COST CATEGORIES
COST
CATEGORIES
UPSTREAM
COSTS
Research &
development
DESIGN
MANUFUCT
URING
COSTS
Purchasing
Direct and
indirect
costs
DOWNSTREA
M COSTS
Marketing
&
distributio
n
Service &
warranties

36. INSPIRA company is about to launch a new product . the company expects a 6
years life cycle from the moment it starts developing this product through its last
sale and installation of the product .However , it also expects to provide after
purchase service as part of the contract within and beyond this period .
The company’s cost estimate are:
R&D $750000
Design 500000
Manufacturing costs 300000
Marketing 200000
Distribution 100000
Customer service 250000
After purchase support 60000
The company plants to produce and sell 1500 installations of the product and
would like to earn a 40% markup over it’s life cycle costs relating to this product .
Also the company find that an average client would incur around $500 of
installation , training , operating , maintaining and disposal costs relating to
usage of this product .What is the expected total life cycle cost per installation for
INSPIRA company? And how much do they need to charge per installation?

37. SOLUTION
PARTICULARS UPSTREAM MANUFACTURIN
G
DOWNSTREAM TOTAL
R&D $750000
DESIGN 500000
MANUFACTURIN
G
$300000
MARKETING $200000
DISTRIBUTION 100000
CUSTOMER
SERVICE
250000
AFTER
PURCHASE
SUPPORT
60000
$1250000 $300000 $610000
TOTAL LCCC $1250000+ $300000+ $610000 = 2160000

38. So without markup installation cost of per product
=2160000/1500
=1440
With required 40%markup total life cycle cost will be
=2160000+(2160000*40%)
=3024000
Then the installation cost per product will be
=3024000/1500
=2016
So if the company wants to achieve 40% markup then it
needs to charge 2016 for the installation of each product.

39. LCC OF ASSETS

40. Here,
AC= initial material acquisition cost
IC= initial Fabrications and installation cost
i=discount rate (calculated from inflation & interest
rate)
N= desired service life of projects
OC= Operating and maintenance costs in year n
LP = Lost production and downtime cost in year n
RC = Replacement costs in year n

41. TAGUCHI COST
In the field of Quality management and
manufacturing industry , Taguchi Quality loss
function proposed a different approach and was a
turning point in how business considered cost of
quality and loss associated with poor quality
product.

42. Developed by Genichi Taguchi, it
is a graphical representation of
how an increase
in variation within
specification limits leads to an
rapid increase in customer
dissatisfaction.
TAGUCHI LOSS
FUNCTION

43. TAGUCHI LOSS FUNCTION

44. Formula to find Taguchi’s Loss Fn
Taguchi uses Quadratic Equation to
determine loss Curve
• L (x) = k (x-N)²
Where L (x) = Loss Function,
k = C/d² = Constant of proportionality,
where C – Loss associated with sp limit
d - Deviation of specification
from target value
x = Quality Features of selected product (reported value)
N = Nominal Value of the product (average)
(x-N) = Tolerance

45. Life Cycle Revenue
The other side of Life Cycle Costing is Life Cycle Revenue.
In 2008, consumer worldwide spend
$50b watching US movies
Until 1970s, main source of revenues
for US studios came from theatre, TV
and international sales
But today, studios rely on a variety of
revenue streams
Case Study:
Motion Picture
Industry

46. Sources of Revenue:
Box office/ Theatre: Main source of revenue, but population that
goes to Box office or theatre is declining.
Home video(DVD): Sales of DVD is declining because this
replacing by Netflix, itune and TV channels.
Pay-per-view: Allows subscribers to Cable and Satellite TV to
order movie through joint venture.
Premium pay channels: License fee is determined based on Box
office performance and can be up to $25m.

47. To maximize revenue, studios divide licenses of movies into
discrete time periods knows as windows of exhibition.
Network or Cable TV: Previously it was considered as a threat
but today it is a great source of revenue.
Syndicated TV: Local stations can bid for the right to show
the movie and can air it for up to 5 years.
Sources of Revenue:

48. Box Office/
theatre
SyndicationNetwork /
Cable TVPay TV
Pay-per-
view
Home Video
[DVD]
Life Cycle Revenue
3 weeks to
8 months
6 weeks before
release to pay-per-
view
2 to 6 weeks before
release to pay TV
Opens 1 year after
release, continue up to 18
months before release to
network/ cable TV
Up to 12 -18 months
before release to
syndication
5 year on network/
cable TV

49. Environmental Costing
Organizations have experienced a rapid rise in environmental
costs, which forced organizations to think systematically
about controlling these costs.
“A costing system that computes the cost of the effects,
an organization has on environment”

50. Environmental Costing
Environmental costs
Explicit
Include direct cost of
modifying technology and
processes, cost of cleanup,
disposal and so on.
Implicit
Infrastructure required to
monitor environmental
issues like admin, legal
counsel, awareness etc.

51. Controlling Environmental Cost
Activity Based Costing (ABC) can applied to measurement,
management and reduction of environmental costs.
Identify the process that causes environmental
costs.
Assign the organizational costs associated with
these processes
Assign those costs to individual products,
distribution channels and customers

52. Environmental Cost
BMW uses parts made of recycled plastics
and parts that can be recycled.
Green manufacturing and regulation to
“take-back” used components required
decision making based on total life cycle
costing.

53. THANK YOU