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Keyword: Life cycle costing is the accumulation of costs over a product's entire life.
The practice of obtaining over their life time, the best use of physical asset at the lowest cost of entity. The definition is brought you by CIMA. Life Cycle Costing is a market based approach to cost for a product.
The practice of obtaining over their life time, the best use of physical asset at the lowest cost of entity. The definition is brought you by CIMA. Life Cycle Costing is a market based approach to cost for a product.
Life cycle costing is different to traditional cost accounting system which report cost object profitability on a calendar basis i.e. monthly, quarterly and annually. In contrast life cycle costing involves tracing cost and revenues on a product by product bases over several calendar periods.
Phases in the Life Cycle of a Product
Every product goes through a life cycle. A product life cycle can be divided into five phases.
• Development
• Introduction
• Growth
• Maturity
• Decline
(a) Development. The product has a research and development stage where costs are incurred but no revenue is generated.
(a) Development. The product has a research and development stage where costs are incurred but no revenue is generated.
(b) Introduction. The product is introduced to the market. Potential customers will be unaware of the product or service, and the organisation may have to spend further on advertising to bring the product or service to the attention of the market.
(c) Growth. The product gains a bigger market as demand builds up. Sales revenues increase and the product begins to make a profit.
(d) Maturity. Eventually, the growth in demand for the product will slow down and it will enter a period of relative maturity. It will continue to be profitable. The product may be modified or improved, as a means of sustaining its demand.
(e) Decline. At some stage, the market will have bought enough of the product and it will therefore
reach 'saturation point'. Demand will start to fall. Eventually it will become a loss-maker and this is
the time when the organisation should decide to stop selling the product or service.
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