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Life cycle costing compared to traditional management accounting techniques
Life cycle cost analysis
Life cycle cost analysis
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Life cycle costing is a process of estimating and accumulating costs over a product’s entire life cycle in order to determine whether the profits earned during the manufacturing phase will cover the costs incurred during the pre- and post- manufacturing stages. Identifying the costs incurred during the different stages of a product’s life cycle provides an insight into understanding and managing the total costs incurred throughout its life cycle. In particular, life cycle costing helps the management to understand the cost consequences of developing and making a product and to identify areas in which cost reduction efforts are likely to be most effective.
Most accounting systems report on a period by period basis and product profits are not monitored over their life cycles. In contrast, product life cycle reporting involves tracing costs and revenues on a product by product basis over
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Asset
An asset can be defined as any item that has a value to an organisation over time. Items such as buildings, physical plant and equipment and computer software are normally regarded as assets.
Life-cycle cost can also be defined as the sum of acquisition cost and ownership cost of an asset over its life cycle, beginning from the design stage, followed by manufacturing, usage, maintenance and ultimately, disposal.
Consideration of all these costs is important, even if they are funded from different sources within an organisation.
Life of an asset
The life-cycle of an asset is defined as the time interval between the recognition of a need or opportunity to create an asset, to the stage of its final disposal. This life cycle is characterised by a number of key stages:
• Initial definition of the concept;
• Development of the detailed requirements, specifications or
...and the useful life of the machine should be calculated. Then, depending on the method used, the total cost of the machine is considered as a long term asset and depreciated over the life expectancy of the asset.
We also focus on product life-cycle of the business goods. The stages the product undergoes from manufacturing packaging until the final stage where it focuses on time, cost and revenue generated. In the initial stage of the product, promotion is done to create awareness of the product. In this juncture profits are not a big concern of the company.
It was the year 1987 when the Gartner Group popularized the form of full cost accounting named Total Cost of Ownership (TCO)(author, Gartner Total Cost of Ownership). Originally TCO was mainly used in the IT business sector. This changed in the 1980’s when it became clear to many organizations that there is a distinct difference between purchase price and full costs of a products ownership. This brings us towards the main strength of conducting a TCO analysis, besides taking the purchase costs into account, which consist of the amount a money an organization pays for the required service, product or capital outlay. It also considers 1. Acquisition costs; these can consist of sourcing, administration, freight, and taxes. 2. Usage costs, which consists of the costs associated with converting the given product or service into a finished product. And finally 3. End of life cycle costs; the costs or profits incurred when disposing of a product. TCO can be seen as a form of full cost accounting; it systematically collects and presents all the data for each proposed alternative.
This is where a firm has a research team look into possible new ideas. and products for a business. This can be very expensive for the firm. No income is made at this stage as there is no revenue coming in. the firm but capital being paid out on resources.
Life-cycle cost analysis (LCCA) is a method for assessing the total cost of facility ownership. It takes into account all costs of acquiring, owning, and disposing of a building or building system. LCCA is especially useful when project alternatives that fulfill the same performance requirements, but differ with respect to initial costs and operating costs, have to be compared in order to select the one that maximizes net savings. For example, LCCA will help determine whether the incorporation of a high-performance HVAC or glazing system, which may increase initial cost but result in dramatically reduced operating and maintenance costs, is cost-effective or not. LCCA is not useful for budget allocation.
Process costing System is an accounting expression which describes one method to determine the manufacturing costs to the units manufactured . Processing is typically used when similar units are mass produced. Also process costing system is a type of accounting process costing which is used to determine the cost of a produced inventory. Chartered Institute of Management Accountants (CIMA) defines process costing as " The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are average over the units produced during the period, being initially charged to the operation or process "( College Accounting Coach, 2007). Process costing is more important and appropriate for all businesses producing identical products during which production is an ongoing flow. Toyota is on the of the major companies in the world that used well-known new philosophic management to produce identical products using process costing system.
Transactional Processing The accounting software packages developed and distributed by Sage and Microsoft, respectively, each use their own methods for recording accounting information. Sage 50. There are three different areas that must be discussed. These are the revenue, expenditure, and financing cycles. These areas are written about from the author's own knowledge from using the software, as learned from the book by Carol Yacht (2013).
The life cycle cost(LCC) of an induction motor involves the total purchasing price , installation and operating cost, maintenance and disposal cost of that motor. When used as a tool to compare design alternatives or possible repair, the LCC method show the most effective solution in terms of cost in the range of necessary data is available The constituents of the life cycle cost analysis typically consist initial costs, installation and operation costs, refurbishment and disposal costs.
Life cycle assessment of a product is a systematic technique that assesses various stages of the life cycle of the product. It takes into account all the operations that product needs to undergo before it is manufactured and then when it is used and finally disposed. LCA tries to do the evaluation in terms of the impact each process will have on the environment. LCA is a systematic and detailed approach considering all the inventory of the material that goes in making a product, it then evaluates the environmental impacts of all the material inputs in terms of releases and thereby helps the decision makers in making an informed decision.
The main method used by businesses to classify assets is to split them into tangible assets, which have a separate existence from the business (examples of which would include buildings, land and machinery), and intangibles which do not. Some clear examples of intangibles include goodwill, patents, research and development expenditure and trademarks. Intangible assets are usually created within the organisation over a period of time, by the company itself, rather than acquired from an external source and are rarely sold off individually they can normally only be sold in conjunction with associated tangible assets.
Therefore, adopting an activity base costing (ABC) system will help managers with many of these issues. Although an ABC system mainly identify costing of products and services, it is also capable of assigning costs to other resources. Furthermore, the approach identifies indirect costs in more details and take other activities into consideration when loading costs (Apak et al, 2012). Yaya (2011) added that while periodic financial statement reporting is based on cost of resources provided, an ABC system also includes cost information about the resources used. The importance of adopting an ABC system at ACME, would be during times when interested consumers wanting modified vehicles for their use. The ABC system can then apply the cost to modifying an original vehicle to specifications of the customer. While an ABC system is beneficial for most manufacturing firms, the system does have some advantages and disadvantages that managers should take into consideration (Blocher et al,
A Product Life Cycle can vary due to various marketplace product or service offerings. Maturity length of time may vary because the end consumer was not prepared to accept the new offerings. Faster maturity breakthroughs can be a direct result of certain production service breakthroughs that usually get accepted quite quickly. Decline of a product or service can be the result of a customer interest and then disinterest. When a product or service does not extend its growth, it can be because the product or service has lost its usefulness. In conclusion, The Product Life Cycle can be used as a marketers planning tool to create portfolio planning, strategy formations, as well as future forecasting. One must never to marketplace, and competition. (Fortenberry, J. L.,
LCA is a robust tool which is employed for enhancing the environmental performance of certain processes, product or systems and in general it is employed for sustainability functions. In LCA paradigm, the analysis is performed for analysing the impacts of environment on certain product or service throughout the life cycle, with the goal of minimization in the environmental damage, in part by enriching the resources preservation and efficient utilization. A life cycle assessment is in general comprised of four steps: goal and scope definition, life-cycle inventory analysis, impact assessment and interpretation. Generally the utilization of energy and other resources as well as the environmental discharges of production materials and energy wastes are analysed
All products go through a product life cycle. A successful product will go through 5 stages, development, introduction, growth, maturity, and decline. It begins in the development stage. An idea is formed and a product is created. The next stage is the introduction stage. In the introduction stage the new product is presented to the market. At this stage early adopters start to purchase the product. If Successful sales will start to increase and the product will move into the growth stage of the product life cycle. If a product reaches the growth stage it is being accepted by the market. Unfortunately the growth stage will not last forever and eventually the market will saturate and sales will begin to flatten out. The longer the maturity stage lasts the better as after this is the decline stage. The decline stage comes when a product becomes obsolete or less desirable sales will decrease and new products will take over. Much of a products success in the latter stages in the product life cycle is down to the performance of new product development so it is critical...
The PLC indicates that products have four things in common: (1) they have a limited lifespan; (2) their sales pass through a number of distinct stages, each of which has different characteristics, challenges, and opportunities; (3) their profits are not static but increase and decrease through these stages; and (4) the financial, human resource, manufacturing, marketing and purchasing strategies that products require at each stage in the life cycle varies (Kotler and Keller, 2006). Whilst there is a common pattern to a product's life cycle, which is bell-shaped in nature, this pattern does vary depending on the specific characteristics of a given product. These life cycle patterns are illustrated and discussed in the subsequent section.