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What are life cycle costs?

A product's life cycle costs are incurred from its design stage through development to market launch, production and sales, and finally to its eventual withdrawal from the market. The component elements of a product's cost over its life cycle could therefore include the following.

Research & development costs
  •  Design
  • Testing
  • Production process and equipment
The cost of purchasing any technical data required
Training costs (including initial operator training and skills updating)
Production costs
Distribution costs. Transportation and handling costs
Marketing costs
  • Customer service
  • Field maintenance
  • Brand promotion
Inventory costs (holding spare parts, warehousing and so on)
Retirement and disposal costs. Costs occurring at the end of a product's life

Traditional cost accumulation systems are based on the financial accounting year and tend to dissect a product's life cycle into a series of 12-month periods. This means that traditional management accounting systems do not accumulate costs over a product's entire life cycle and do not therefore assess a product's profitability over its entire life. Instead they do it on a periodic basis. Life cycle costing, on the other hand, tracks and accumulates actual costs and revenues attributable to each product over the entire product life cycle.
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