PM Revision Notes

LIFE-CYCLE COSTING

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 LIFE-CYCLE COSTING

Life-cycle costing tracks and accumulates the actual costs and revenues attributable to
each product over its whole life time

Include these costs when calculating the lifetime costs of the product:

(i) Research and development costs

(ii) Design costs

(iii) Planning and concept design costs

(iv) Testing costs

(v) Advertising costs

(vi) Production costs

(vii) Distribution and customer service costs

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MC12 - Paper Specimen 2016

Which of the following statements regarding life-cycle costing are correct?

(1) It can be applied not only to products but also to an organisation’s customers

(2) It includes any opportunity costs associated with production

(3) The maturity phase is characterised by a rapid build-up in demand

(4) Often between 70% to 90% of costs are determined early in the product life cycle

Solution:

Customer life-cycle costing can be used by organisations.

It has been reported that the majority of a product’s costs are determined early on, i.e. at
the design phase.

Life-cycle costing does not include any opportunity costs associated with production.

The growth phase is characterised by a rapid increase in demand.

MC12 - June 2015

The following statements have been made about life cycle costing:

(i) It focuses on the short-term by identifying costs at the beginning of a product’s life cycle

(ii) It identifies all costs which arise in relation to the product each year and then calculates
the product’s profitability on an annual basis

(iii) It accumulates a product’s costs over its whole life time and works out the overall
profitability of a product

(iv) It allocates costs to each stage of a product’s life cycle and writes them off at the end of
each stage

Which of the above statements is/are correct?

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MC1 - September 2016

Answer:

OAR for fixed production overheads ($72 million/96 million hours) = $0·75 per hour

Total manufacturing costs (300,000 units x $20) = $6,000,000

Total design, depreciation and decommissioning costs = $1,320,000

Total fixed production overheads (300,000 units x 4 hours x $0·75) = $900,000

Total life-cycle costs = $8,220,000

Life-cycle cost per unit ($8,220,000/300,000 units) = $27·40

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