Application of Life Cycle Costing in assisting the process of planning, controls

and decision-Making

Under planning process, life cycle costing will help management to identify
the cost drivers that affects overall life cycle of the product and estimation of the
number of occurrence. Thus, management can improve their budgeting process as
more accurate date can be incorporated and collect into the planning phase.
Next, it is also encourage management in making a detailed schedule for better-cost
projection spending more than one calendar period. This is because the relationship
between costs and time period in which costs are expected to be have been
established. Furthermore, management is able to identify any possible variances in the
estimation costs for further monitoring at the early stage. Hence, management will
prepare and take early step to mitigate risk regarding to the product.

Under controlling process, by implement life cycle costing, the management is

able to identify negative variances by comparing estimated cost and actual cost that
are use to evaluate the impact on product life cycle cost. Thus, this information helps
management to determine which areas need to be focused on for cost reduction. At
the same time, the variances gathered earlier will be analyzed for further optimization
and improvement. Optimization here means to reduce the impact of negative
variances on the product life cycle costing by ensuring the solution for it will give the
positive impact of the total cost of product.

Under decision-making process, life cycle costing helps management to make

better decision by evaluate the relationship between several costs in a product’s life
cycle and see the extent of the impact from decision made. Next, management is able
to decide the best alternative that worth pursuing based on the total life cycle cost of
the product.
Advantages and Disadvantages of Lice Cycle Costing

The advantages of lice cycle costing is help the management to develop

potential profitability of product. The potential profitability of products can be
identified before major development of the products is carried out and costs incurred.
Thus, this will helps management to avoid producing the non-profitable product at an
early stage before the costs are committed. Next, life cycle costing helps in reducing
the costs of products. This method of costing helps management to forecast and plan
the product’s life cycle cost effectively by minimize the cost while maximize the
profits.

Next, by using life cycle cost method, it can lead to better control of marketing
and distributions costs. This is because of pricing strategy can be determined before
the product enters production. Furthermore, by monitoring and evaluate the actual
performance against the plans, the lesson can be learnt to improve the performance of
future products. Lastly, life cycle costing can help in reducing research and
development phase. Management focus to shorten this phase to get the product to
market as quick as possible. The longer the company operates without competitor, the
more revenue can be earned and the sooner the products reach the breakeven point.

The disadvantages of life cycle costing is time consuming. This is because the
management considers extensive data research to ensure an accurate collection of
information and data from various sources. Next, high operating costs. The longer it
takes for accurate data to be gathered to calculate the product’s life cycle cost, the
higher the operating costs will be. Lastly, the changes of technology. The introduction
to the new technology can replaced the outdated ways of calculating costs in the life
cycle costing methods. Management needs to catch up with the new way to calculate
the product’s life cycle cost.

Implications of Life Cycle Costing

The implication of life cycle costing can be seen in pricing, business

performance and decision-making. For pricing, under traditional method, research
and development cost from the new product are written off against the revenue
generated by the old product. This making the old product looks less profitable.
Furthermore, this give distorted view on the evaluation of the products profitability.
While, under life cycle cost method, the sum of all costs incurred over the lifetime of
owning the product will be allocated over the products on life cycle such as the
maintenance cost and any cost of upgrades the product. This assist management better
in choose the best alternative and product that will maximize the profit to the
company.
 Next, the implication on business performance is life cycle costing enable the
business to recognize the fact that up to 90% of their costs will be in research and
development phase. Thus, it can focus on making the phase as short as possible and
getting the products to the market as quickly as possible so that they can start to
generate revenue. Next, life cycle costing also enables the management to track cost
through life cycle of the product, so the management can determine whether the
product profitable or not.

Lastly, life cycle costing will give implication in decision-making. The

management enables to make decision on making new investments in the product
(new capital expenditure) or withdrawing a product from market if the products not
making any profit to the company. In a nutshell, life cycle costing helps management
by identifying and minimizes the cost while looking ways to maximize the profit.

ALIA (NOKIA)

Life Cycle Costing (LCC) for Assets

a) Tangible asset.
Life Cycle Costing (LCC) for assets is a process of compiling all costs
incurred by the owner from owning, operating, maintaining and
disposing of the assets (Fuller & Peterson, 1995). Buying an asset is a
cost commitment that extends beyond the price tag. For example,
buying a car. The car’s price tag is only part of the car’s overall life
cycle cost. People should also take consideration of other car’s
expenses such as petrol, maintenance, insurance, oil changes and
interest. If you do not planning for all these additional costs, it will
burden you in the future.

The owner need to make decision on the acquisition and ongoing use
of the assets. LCC have been developed to assist owner to predict how
much cost that they need to pay when acquire a new asset and help
them in making better decision. There are few expenses that need to be
estimate in order to calculate the asset’s life cycle cost which are
acquisition price, facility management cost (operating and
maintenance), depreciation and disposal cost. The total life cycle cost
can be determine by adding up all these costs.
 Acquisition price is the initial cost, it is the outlay incurred prior to
putting the assets in service. It is important to have good understanding
of how the assets will perform in future. By using life cycle costing,
owner can predict if the asset’s return on investment (ROI) is worth the
expenses. If the owner do not estimate the future costs, he/she will
overestimate the ROI. Pinto and Kharbada (1996) indicated that
ignoring environment contributes to project failure.

In addition, according to El-Haram and Horner (2003) facility

management costs may be two to three times higher than the
acquisition costs. Facility management costs consists of operating and
maintenance costs. These costs are the costs that incurred after the
assets have been place in service. If the owner only factor in the initial
cost of an asset, he/ she could end up spending more in the long run.
For example, buying a used asset might have a lower price tag, but it
could cost the owner in repairs than a newer model.

Furthermore, tangible assets are the asset that is fully depreciated.

Therefore the owner needs to incur the depreciation cost in calculating
the overall asset’s life cycle costing. The owner should predict how
many value that he asset will lose every year.

Disposal cost is a future cost that difficult to estimate. Disposal cost is

the cost or gain of getting rid of the assets after use. Disposal cost also
refer to the costs that the owner need to incur when he/she want to
remove the assets from the business. For example, if a manufacturing
owner want to remove machine, they need to hire independent
contractor to get rid the asset from the factory. In a nutshell, the life
cycle costing for assets is not only about the price tag of the asset. The
owner needs to consider other additional expenses so that they can
make better decision and comparison.

b) Intangible asset.
Life cycle cost also can be applied for intangible asset in order to
estimate how much the cost. Intangible assets are assets that lack
physical substance such as patents, copyright, trademark, brands and
goodwill. Although it is more difficult to sum up the total cost of an
intangible assets, but it is still possible. For example, in order to
develop and maintain a business brand, the owner need to spend
money on all the things that go into it such as cost for developing the
logo, registering the company’s name, cost of setting up website for
the company. Besides, the owner also needs to incur advertising and
marketing cost in order to make the company’s brand become well
known among the customers.
 In conclusion, it is possible to calculate the life cycle cost for
intangible assets. The owner needs to estimate other additional cost
and benefits before making decision whether to purchase the intangible
asset or not.

SHAI (CONCLUSION & RECOMMENDATION)

REFERENCES
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Overview: What is Life Cycle Costing? Retrived from
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https://www.researchgate.net/publication/235636259_Life_Cycle_Cost
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the traditional cost system and its application on a pharmaceutical company.
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