Life-cycle costing offers a different way to look at overall product costs than other types of costing such as job-order, process, and activity-based costing.
While many costing methods seem very similar, life-cycle costing stands out from the crowd. Life-cycle costing takes an entirely different view on product costing than other types of costing methods such as job-order and process costing. Finding the right product costing method is essential for a business to stay competitive in today’s cost-conscious world.
What is Life-Cycle Costing?
Life-cycle costing is a method of costing that looks at a product’s entire value chain from a cost perspective. Other types of costing generally look only at the production process, whereas life-cycle costing tracks and evaluates costing from the research and development phase of a product’s life, through to the decline and eventual conclusion of a product’s life.
This approach to costing makes sense for several reasons. First of all, most of a product’s costs are committed before the product is in the production phase. This means that the majority of control management can exert over production and other costs is during the design phase of the product’s life-cycle.
Life-cycle costing also looks at product costs post-sale. Examples of this type of cost are warranties, customer service, marketing, and distribution costs. Where most types of costing systems focus on cost control, life-cycle costing focuses on reducing costs throughout a product’s life.
Life-Cycle Costing and Value Engineering
Life-cycle costing is also heavily associated with value engineering. Value engineering is a process used by businesses to reach target cost goals. This process touches all aspects of a product. It is designed to eliminate activities that do not add value, and increase efficiency in activities that are necessary and do add value.
Life-Cycle Costing Procedures
In its standard form, life-cycle costing cannot be used for financial reporting and in and of itself is not consistent with generally accepted accounting principles (GAAP). However, life-cycle costing is perhaps the best form of costing from a planning standpoint, and is a great tool that can be used by product managers throughout the life-cycle of a product.
In order to use life-cycle costing to its fullest, costs must be calculated from the point of the initial idea for the product, until the product is no longer made. These costs are then divided by the total number of expected units to be sold throughout the lifetime of the product to come to a total cost per unit. This process can help product managers to get a realistic view of the total cost of a product, so they can design and adjust accordingly.
When is Life-Cycle Costing Appropriate?
Life-cycle costing is most appropriate when a product is in the design, or pre-design stages. This will allow management to gain the most benefit from the process, as opposed to attempting to use life-cycle costing after a product is already in the marketplace.
