Life Cycle Costing is an economic strategy that gives a longer-term view of the product line’s profitability. This method emphasizes the importance of tracking and evaluating costs at every manufacturing stage. This also aids in reducing manufacturing costs. The effectiveness of life cycle planning, cost information, and cost data are very high.
Advantages of Life Cycle Costing
Costing for life provides the following advantages:
- It assists in price determination by providing valuable data. This is particularly important today, as the process of developing a product is very long, and many expenses must be incurred.
- This process is beneficial because it covers the costs of the six main categories, including research and development, product design, manufacturing distribution, marketing, and customer service. This is crucial because the process assists the manager in gaining valuable knowledge.
- This strategy covers the entire life cycle of the product. It is called the “womb into the tomb” (lifelong) or “cradle to grave” (throughout the lifespan) method.
- It is a way to give importance to all costs and does not limit itself to manufacturing costs, which are typically more apparent. This process helps to identify the more intangible costs, such as the upstream cost of research and development, and downstream costs, such as customer service.
- Life cycle costing emphasizes the link with cost types. Many companies are facing a massive increase in the cost of customer service due to the reduction of R&D budgets. This method identifies the areas that need to be clarified on a calendar-based cost statement.
- The cost of living is also helpful in making decisions about capital budgets. This method considers capital and revenue costs for better decision-making.
Application of Life Cycle Costing
This method is a cost for the object, which could be a project or product. It is a method that monitors and records the actual expenses and profits attributed to an object. The object’s profitability is assessed after its financial life. This method is distinct from the traditional cost accounting system calendar-based and gives monthly, weekly, or yearly reports on profitability. Life cycle costing, on the contrary, tracks revenue and revenue over various calendar months. It also allows the payment and cost to be analyzed according to the period.
The principal purpose for life-cycle costing would be to quantify and manage the cost over the entire life-cycle of the merchandise. A few other uses include:
- Finding the most practical purchase method
- Determining cost drivers.
- Strategic decision-making regarding design compromises.
- Making the most effective alternatives,
- The most appropriate source selections,
- Evaluation and implementation of the latest technology.
- Setting the goals for monitoring the activities,
- In addition to enhancing the criteria for the design and development of products,
- Positive outlook and forecast of budget needs.