CHITKARA UNIVERSITY, PUNJAB
PERFORMANCE MANAGEMENT
CML 3201
PROJECT-LIFE CYCLE COSTING
LIFE CYCLE COSTING
Life cycle costing is defined as the total cost throughout its life including planning, design, acquisition & support costs & any other costs directly attributable to owing / using the asset.
Category of LCC capital assets:
• Initial costs
• Operating costs
• Disposal costs
SIMPLE FORMULA FOR LCC
LCC= Capital + Lifetime operating cost + Lifetime maintenance cost + Disposal cost –Residual value
NUMERICAL EXAMPLE
1. A company is planning a new product. Market research information suggests that the product should sell 10,000 units at RM21/ units. The company seeks to make a mark-up of 40% product costs. It is estimated that the lifetime costs of the product will be as follows: 1. Design and development costs RM50,000 2. Manufacturing costs RM10/ units 3. End of life costs RM20,000 Required: What is the original lifecycle costs per unit? LCC/ unit = RM50, 000 + (10,000 units RM10) + RM20, 000 / 10,000 units =RM 17 OBJECTIVES • Assists management to smartly manage total cost throughout product’s life cycle. • To identify areas in which cost reduction efforts are likely to more effective. • To estimate the cost impact of various designs and support options. ASPECTS OF LIFE CYCLE COSTING There are 2 important points : The focus on the product cost The inclusion of all upstream and downstream cost A Product Life Cycle may be classified into 3 broad stages, namely : Planning and Design Manufacturing and Sales Service and abandonment STAGE OF PRODUCT LIFE CYCLE COSTING Planning and design stage- Research and development costs, costs of product design, etc. Manufacturing stage- Witnesses both growth and maturity in sales. All the manufacturing, marketing, selling and distribution costs are incurred at this stage. Service and abandonment stage- This stage signified by a decline in a sales volume. The demand for the product declines at this stage. The producers may be required to provide after sales service for the already sold products. Costs that are incurred in this stage include all costs relating to after sales service including provisions of spares and expert services and cost of abandonment and disposal of the product. ADVANTAGES OF LCC- Improve Forecasting- The application of LCC technique allows the full cost associated with a procurement to be estimated more accurately. Improved Awareness- Provide management with an improved awareness of the factors that drive cost and the resources required by the purchase. Performance trade-off against cost- LCC technique not only focus on cost but also consider other factors like quality of the goods and level of service to be provided. DISADVANTAGES OF LCC- Time consuming- Life cycle costing analysis is too long because of changes of new technology. Costly- The longer the project life time, the more operating cost will be incurred. TECHNOLOGY- Technology always change to change. IMPLICATION OF LCC- PRICING- Knowing life cycles ensures appropriate price of the products. PERFORMANCE MANAGEMENT- Highlights the cost consequences of developing and making a product. To identify areas in which cost reduction efforts are likely to be most effective. DECISION MAKING- Provides premises for decisions-making regarding …show more content…
Required
Calculate the cost per unit looking at the whole life cycle and comment on the suggested price.
SOLUTION-
R&D (1,900 + 100) $‘000
2,000
Marketing (100 + 75 + 50 + 10) 235 Production (1,000 + 6,750 + 8,000 + 2,250) 18,000 Customer service (100 + 600 + 800 + 200) 1,700 Disposal 300 Total lifecycle costs 22,235 Total production ('000 units) 42 Cost per unit 529.40
The total lifecycle costs are $529.40 per solar panel which is higher than the price proposed by the marketing director. Solaris will either have to charge a higher price or look at ways to reduce costs.
It may be difficult to increase the price if customers are price sensitive and are not prepared to pay more. Costs could be reduced by analysing each part of the costs throughout the life cycle and actively seeking cost savings. For example, using different materials, using cheaper staff or acquiring more efficient