MAF651: SEMINAR IN MANAGEMENT

ACCOUNTING
SEMINAR 1:
LIFE CYCLE COSTING
CLASS: AC220 8D
STUDENTS’ NAME ID NUMBER
ARISYA BINTI ABD WAHID 2017193757
IZYAN MUAAD 2017129399
NADZIRAH ASYIQIN BINTI MOHD NADZRI 2017979803
NURUL NADIAH BINTI MOHD NAJJIB 2017779347
AIMAN NAZMI BIN AZRI 2017393039

SUBMITTED TO : DR. ZARINAH HJ. ABDUL RASIT

SUBMISSION DATE : 16TH NOVEMBER 2020
 TABLE OF CONTENTS

Page
Contents
No.

Acknowledgement

1.0 Introduction 1
1.1 Objectives of Life Cycle Costing 2

2.0 Characteristics of Life Cycle Costing 3

3.0 Differences between Life Cycle Costing and traditional costing 4

4.0 Stages of Life Cycle Costing 5

4.1 Characteristics of Life Cycle Costing at each stage 6-7
4.2 Differences between Life Cycle Costing and Product Life Cycle 8-9

5.0 Process of Life Cycle Costing 10-11

6.0 Cost in Life Cycle Costing 12-13

7.0 Advantages & Disadvantages of Life Cycle Costing 14

8.0 Conclusion and Recommendation 15

References 16
ACKNOWLEDGEMENT

First and foremost, praises and thanks to Allah S.W.T for His showers of blessings
throughout our research work to complete this Seminar 1 project on the topic that was given to
us which is Life Cycle Costing.

We would like to express our deep and sincere gratitude to our lecturer, Dr. Zarinah Hj.
Abdul Rasit, for giving us the opportunity to do the research based on the topic and providing
invaluable guidance throughout the research work. It was a privilege and honour to work and
study under her guidance as she has taught us the methodology to carry out and to present the
case study.

Next, we are very much thankful to every single of our group members for giving time
and the best effort to complete the project despite the challenges that we faced in this new
norm. With our commitment given in this work, we have completed the task smoothly.

Not to forget our fellow classmates and friends who have helped us a lot. We are
thankful for their assistance and moral support that kept us motivated to complete this project.
With their helps, our research work has been eased and went well.

Last but not least, we would like to express our gratitude to our loving and supportive
parents and family whose love and encouragement are always with us in whatever we are doing.
Besides, we would like to thank them for giving us space and being understanding towards us
when we were completing the project at home due to this pandemic.
1.0 INTRODUCTION

Life cycle costing is an analysis technique that encompasses all cost associated with
a product from its inception to its disposal. All cost throughout the product’s life including
planning, design, and supporting cost and any other cost that are directly attributable to own
or utilize the asset.

Life cycle costing require the future cost to be calculated by taking consideration the
time value of money. The reason the system required to do so as referring to the fact that same
amount of money spent or received between now or later will have a different value. One may
state that the future present value of current money will be greater because of earned interest
or smaller due to inflation. Similarly, the present value of the money is generally less.

In life cycle costing, the future cost such as operation and maintenance must be
converted to their appropriate values before adding them to the item’s procurement cost. There
are number of formulas developed to convert the money from one time to another. This to
ensure that all business who implemented this costing method follow these formulas to avoid
any over or understated cost that might impact the decision making of the users.

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1.1 OBJECTIVES OF LIFE CYCLE COSTING

Life cycle costing analysis can be carried out at any time at any phase of an asset’s life
cycle. It can be used to provide information on the analysis carried out to decisions regarding
the design, manufacture, installation, operation, maintenance support, refurbishment and
disposal.

The objectives of life cycle costing are to minimize the total cost of ownership of the
utility’s infrastructure to its customers and giving a desired level of sustained performance.
Incurring higher cost will lead to imposing a higher selling price, and it does not mean the
quality are guaranteed. Sometimes it is related to the operation or process of producing the
product, such as type of machine used, their lubricating oil used and many more. The business
may save the cost if they make a proper survey on the best quality of raw material or ingredients
to produce a finished good with a good quality. Producing a good product with a great quality
with a lowered price will maximize the customer satisfaction.

Furthermore, the analysis helps the management to evaluate the investment options and
opportunities effectively. In order to decide whether any investment that may boost their
growth, they must know whether their current product costs are maintain throughout the year
or increment may occurred. If there might be increment, they must find better options to invest
in order to gain a return to cover the cost they incurred. It is important to know the costs from
the time being so the management may predict the future value of the cost and the suitable
investment return.

Lastly, the analysis purpose is to ensure the effective management of asset over its
useful life. Shorten useful life of an asset meaning that the asset is not well-maintained, or the
asset was not assessed from time to time due to negligence. When these assets’
life is shortened, the management need to find replacement and it may cost a lot. This situation
may not occur if the management managed the asset very well and keep evaluating the asset
performance either it still operates at a full efficiency or not.

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2.0 CHARACTERISTICS OF LIFE CYCLE COSTING

Life cycle costing has its own characteristics which makes it differ from other
accounting techniques. There are several characteristics that can be found in life cycle costing.

One of the characteristics of life cycle costing are it involves tracing of costs and
revenues of a product over several calendar periods throughout its life cycle as this approach
used to provide a long-term picture of product line profitability, feedback on the effectiveness
of the life cycle planning and cost data to clarify the economic impact on alternative chosen in
for example the design and engineering phase.

Other than that, life cycle costing also traces research and design and development costs
and total magnitude of these costs for each individual product and compared with product
revenue. This enables company that adopts this approach to calculate the real cost of the
products and have knowledge about the actual cost of the production.

Furthermore, it may be extended by finding new uses or users or by increasing the

consumption of the present users. For example, the management may get feedback from
surveys that are given to their customers. By doing this, they can get feedback to improve and
enhance or create new things in their business performances that can meet customers’
satisfaction.

Each phase of the product life cycle poses different threats and opportunities that may
require different strategic actions. For instance, during implementing & monitoring LC,
continuous monitoring of the actual performance of an asset is needed to identify any cost that
can be saved during that stage.

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3.0 DIFFERENCES BETWEEN LIFE CYCLE COSTING AND TRADITIONAL
COSTING
TRADITIONAL COSTING
Profitability is ascertained annually. Each
year, the management will analyze whether
the product still can give them a better profit
for the next annual period.
Life of the product is separated into several
annual period and strategies prepared
annually. Meaning the production of new
product may be slower due to slow
movement of strategy preparation. The new
product produced during that period may
become obsolete.
Some costs are never traced to a product and
being charged to all products based on the
period or volume during the period, such as
research and development costs. During the
launch of the product, the cost still remains
the same throughout the whole period and
imposed to all products.
No early actions can be taken as product life
is unknown. Since the product being assessed
annually, it is hard for the management to
construct a strategy as the accumulated cost
during that time has become large and they
unable to assess which period or product part
that need attention.
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LIFE CYCLE COSTING
Profitability is ascertained over life. Each
period in a year, the management will
analyze the product either it will give them
targeted profit throughout the year or there is
decline of sales during the year.
Life of product is separated into several
phases within their own characteristics and
strategies. Phases by phases, the
management may slowly create a new
strategy to produce a new innovative product
or enhance their current product with a better
cost management due to taking count the
future value of the cost.
Costs related to a product are always charged
to that product. If there is any research and
development cost incurred, the costs will be
recognized only to that particular product,
not overall products.
Early actions can be plan in advanced. When
the product been assessed from phases to
phases in a year, the management already
know what are the defects or when is the
period that the business sales are not doing
well. Thus, from the results they analyze,
they can build a strategy in order to improve
their performance either enhancing the
current product or cut some unnecessary
costs.
4.0 STAGES OF LIFE CYCLE COSTING

Generally there are 5 stage of life cycle costing which are:

• Stage 1: Product planning and concept design

• Stage 2: Design and development
• Stage 3: Production or manufacturing
• Stage 4: Distribution and customer support
• Stage 5: End of product’s life

To have a clear view on the

Diagram 4.1stage of life cycle costing, let’s look atDiagram
the diagrams
4.2 below.

As we go through at the diagrams, we can see there are movement of committed cost
and incurred cost across the product life cycle phases. What is committed cost and incurred
cost?

Committed cost is the cost that will be incurred in the future from the decision that has
been made. Committed cost can be said as sunk cost too. This type of cost cannot be recovered
by any means because the obligation has already been made or received. Therefore, the
organization should be very careful in determining their costs to avoid paying an unnecessary
cost that could reduce product’s profitability. The examples of committed costs are machine
depreciation and injury insurance for the production labor.

While in the other hand, incurred cost or cost spent is the cost when resource or assets
is used or received. This cost used an accrual accounting concept where the cost will be
recorded when it has been used even though it has not been paid yet. The example of incurred
cost are raw material, water and electricity and transportation cost.

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4.1 CHARACTERISTICS OF LIFE CYCLE COSTING AT EACH STAGE

Stage 1: Product planning and concept design.

In this stage, the management will determine the type of cost and perform market
research for the product planning. It enabled the organization to produce right the product at
the right price when the cost is allocated correctly. They also will set their targeted customer.
When the product satisfies the customer’s need with an affordable price and excellent quality,
it will be sold well in the market.

In this stage also the management will design the concept of the product. For an
example, the product is made to give less hustle, flexible and time saving to its user. They also
will entail the product expected life and performance, maximum permissible maintenance cost
and functionality. The committed cost in this phase is market research cost.

Stage 2: Design and development.

In this stage, the management will design the product by doing proper product drawing,
product’s functionality and production schedule. By doing so, they can produce the product at
the right time with an attractive product design where people will race to buy it. For an example,
they produce the touchless hand sanitizer that use sensor since people demand zero physical
touch due to the pandemic as they do not want to get infected by Covid-19.

Apart from that, the management will also develop a prototype of the product during
this stage. The prototype will act a guidance to produce the product. They could test on the
prototype and make some improvement for any variance from the expected quality or results.
They also will select the supplier to supply their raw material and packaging material. The cost
committed and incurred during this stage is prototype development cost and the machinery cost
if they acquire the machine or machinery rental if they get the machine through leasing.

Stage 3: Production.

In this stage, there is transformation (process) of raw material (input) into desired
products (output). They have received the order of the products and the product also has
obtained customer’s demand. They continue to produce the product according to the order. The
examples of activity involved in this stage are quality control and material management and
handling.

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 The cost committed in this stage is the injury insurance for the production worker and
pollution fines and the cost incurred in this stage is production labor cost, raw materials and
initial operator training on handling the machine.

Stage 4: Distribution and customer support.

In this stage, there are 2 components of distribution which are distribution channel and
physical distribution. Distribution channel is the process or medium the products is transferred
from the producer to the consumer. It can be transferred through the retailer whom act as the
middleman and the wholesaler. While the physical distribution responsible on the physical
products handling and achieving excellent customer satisfaction regarding the delivery time
and the quality of the products delivered.

Since there are fluctuations of sales and demand in this stage, the organization need to
incur extra cost to improve the after sales service and the delivery time. They also need to take
an action to increase their sales if there are declining trends in sales. It will enable the product
to exist longer in the market when there are demand from the customer. An organization is
advised to always provide good customer service during the after-sales step, because this is
essential to creating loyalty and attracting consumers.

The cost committed in this stage is the warranty expenses for the broken products that
does not meet its optimum expectation life and after sales cost such as spare parts. The cost
incurred in stage 4 is the distribution cost such as transportation and handling cost and
advertising cost.

Stage 5: End of product’s life.

In this stage, the organization has discontinued its operation for the product. The no
demand as well as sales of the product. The organization need to bear the cost of
decommissioning, disposal and environmental clean-up.

When the production has been discontinued, the organization might consider to sell the
machines. The same goes to the environmental remediation where they will heal the nature as
they had caused the air pollution from the combustion process and released the toxic waste
during the production operation.

At the end of product’s life, the committed cost is cost of product disposal and recycle.
The incurred cost is the disposal of unused material, environmental cleaning cost and
decommissioning cost.
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4.2 DIFFERENCES BETWEEN LIFE CYCLE COSTING AND PRODUCT LIFE
CYCLE

In order to have better understanding on product life cycle and its difference between life cycle
costing, let’s look at the diagrams below.

Diagram 4.1 Diagram 4.3

Product life cycle emphasis on the progress of the product from the beginning until the
ending of the product’s life. It helps the organization to manage its sales and marketing,
determining selling prices, forecast its profitability and compete with the competitor in the
market. In product life cycle, it has 5 stages which are development stage, introduction stage,
growth stage, maturity stage and decline stage.

In the development stage, it is where the research and development of the product takes
place. There is no sales and revenue generate in this stage. Next, in the introduction stage, the
product is firstly introduced in the market and the organization need to do aggressive
advertising & promotion to make the potential customer realized on the product’s existence
and attracted to buy it.

In the growth stage, the sales revenue and demand has increased as the products has hit
the market excellently. There is high competition in this stage that render the organization to
reduce its price to remain competitive. Next, in the maturity stage, the sales and demand of the
product has slowdown and entering the declining phase. The organization can do product
improvement or modification to sustain its existence. Finally, in the decline stage the product’s
demand and price has started to drop.
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The selling of the product is not profitable anymore as the organization is facing the loss at
this stage and it is the right time for the organization to withdraw it product from the market.

The difference between life cycle costing and product life cycle is it’s the measure of
focus. In life cycle costing, it observes the cost behavior from the beginning to the end of
product’s life. Plus, the activities done throughout the product’s life that trigger the cost
movement. While in product life cycle, it focuses more on the behavior of the sales and
demands throughout the product’s life. Also, the effort made to retain the product in the market
when it has started to become dull and less appealing in the market.

Furthermore, in in life cycle costing, it helps the manager to do the production budget
on the products as well as identify which cost can be controlled, reduces and eliminate by
recognizing the committed and incurred cost. While in product life cycle it aids the
management to set the right prices and marketing strategies all over the product’s life to remain
competitive in the market. This is due to the high competition in the market that cause the
fluctuations in the product’s demand.

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5.0 PROCESS OF LIFE CYCLE COSTING

Life cycle cost is a six-staged process whereby it first started with plan analysis, select
or develop model, apply model, document and review result, prepare life cycle cost analysis
and lastly ended with implementing and monitoring life cycle cost analysis. The first four
stages comprise of life cycle cost planning and the last two stages comprise of life cycle cost
analysis.

The Life Cycle Costing process begins with development of a plan, which communicate
the purpose and scope of the analysis. It is important for the plan to describe the analysis
objectives in terms of outputs required to assist a management decision. The examples of the
objective are to assist planning, contracting, budgeting or similar needs, identification of cost
elements which act as cost drives for the LCC of an asset and evaluation of the impact of
alternative courses of action on the LCC of an asset. Next, the plan should include detailed
schedule about planning of time period for each phase, the operating, technical and
maintenance support required for the asset. In addition, it also needs to identify any underlying
conditions, assumptions, limitations and constraints such as minimum asset performance,
availability requirements or maximum capital cost limitations that might restrict the range of
acceptable options to be evaluated. Lastly, the plan should identify alternative courses of action
to be evaluated and provide an estimate of resources required and a reporting schedule for the
analysis to ensure that the LCC results will be available to support the decision-making process.

In the second stage of the process, a life cycle cost model selected or developed should
satisfy the objectives of the analysis and thus the model should create or adopt a cost breakdown
structure that identifies all relevant cost categories in all appropriate life cycle phases. In order
to develop a life cycle cost model, there are also several stages such as identifying the cost
elements, determining the cost category and developing a cost breakdown structure that needed
to be done so that all the cost required in a project could be control. Firstly, the cost elements
need to be identified and grouped according to relevant cost category. Once relevant cost
categories have been recognized, a cost breakdown structure must be developed. Finally, based
on the developed cost breakdown structure, a life cycle cost model could be developed.

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 Next, in the third stage, the life cycle cost model will be applied to calculate the overall
cost of ownership of machinery, equipment or asset of the company. The next process which
is the fourth stage, the result will be documented and reviewed to analyse the effectiveness of
the life cycle cost model that have been developed, this step will help to identify any
weaknesses that can be improve or change.

The next stage in the process will be the preparation of Life Cycle Cost Analysis. It is
essentially a tool, which can be used to control and manage the ongoing costs of an asset or
part of it. It is based on the LCC Model developed and applied during the Life Cost Planning
phase with one important difference: it uses data on real costs. The preparation of the Life Cost
Analysis involves review and development of the LCC Model as a “real-time” or actual cost
control mechanism. The estimation of capital costs will be replaced by the actual prices paid.
Changes may also be required to the cost breakdown structure and cost elements to reflect the
asset components to be monitored and the level of detail required. Future costs are set for the
operating costs and their frequency of occurrence based initially on the estimates used in the
Life Cost Planning phase. However, these estimations may change with time as more accurate
data is obtained, from the actual asset operating costs or from the operating cost of similar
another asset.

The last stage of the process is implementing and monitoring Life Cycle Cost Analysis.
Implementation of the Life Cost Analysis requires continuous monitoring of the actual
performance of an asset during its operation and maintenance to identify areas in which cost
savings can be made and to provide feedback for future life cost planning activities.

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6.0 COST IN LIFE CYCLE COSTING

ACQUISITION COST

Acquisition cost is the initial cost or also known as capital cost. In a Life Cycle Cost, people
will try to minimize capital cost in order to reduce the total project cost. It is a cost outlay which
is required in order to put a system or an asset into service to benefit the users. It includes all
the costs required to implement a project or to run an asset. Under this cost category, it could
further breakdown into several cost elements varying according to the industry, system or asset
to be applied. Acquisition cost could breakdown into purchase price, installation cost, training
cost, conversion cost and transportation cost.

OPERATING COST

Operating cost is the cost required to operate a system or an asset during its useful life. It is
categorized under the facility management cost which is the same categories with maintenance
cost. Operating cost is one of the cost categories which consume a large portion of the total
cost, it is probably higher than the acquisition cost. In Life Cycle Cost analysis, operating cost
is usually a future cost which is unknown, especially for newly developed assets. Therefore,
the operating cost data are likely to be unavailable and practitioners or decision makers need
to make assumption based on their experiences. Generally, operating cost can be broken down
into direct labour cost, utilities cost, spare parts maintenance cost, custodial cost, insurance and
rental.

MAINTENANCE COST

Maintenance cost is the cost required in maintaining a system or an asset when the system or
asset breaks down during its useful life. Similar to operating cost, it is also an unknown cost
data for newly developed asset as it is the future cost outlays and assumption is required. It can
be divided into scheduled maintenance cost and unscheduled maintenance cost. Maintenance
cost can further be broken down into preventive maintenance cost, reactive maintenance cost,
custodial cost, material cost, labour cost and cost of repair.

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DISPOSAL COST
Disposal cost or also known as residual value is also a future cost and it is often difficult to
estimate. It is the cost used in disposing or getting rid of the asset after the end of its useful life.
However, sometimes disposal cost also known as salvage value if the asset could be sold as a
second-hand product and gain some cost from it. Thus, disposal cost could be broken down
into salvage value, removal cost, conversion cost, cleaning of site and waste disposal.

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7.0 ADVANTAGES & DISADVANTAGES OF LIFE CYCLE COSTING

Life cycle costing helps organisation to determine profitability in better way and
enables the decision making that results in higher profitability. However, every accounting
technique has its own advantages and disadvantages.

One of the advantages are life cycle costing promotes long-term benefits than short-
term as it involves tracing costs and revenue of products over several calendar periods rather
than calendar basis. Therefore, it is a method used to provide a long-term image of the viability
of the product line, input on life cycle planning effectiveness and cost data to explain the
economic impact on the alternative chosen in the design and engineering process.

Life cycle costing enables companies to get a complete picture about the total product
life. This is because the organisation considers past costs, current costs and potential cost
projections as well. Thus, at any point, they will be able to recognise any unnecessary costs.
With life cycle costing, the company is now aware of the costs at any point and can more easily
fix inefficiency and overspending. For instance, the expense of the 100 hours of testing that
goes into making a new toy not be taken into account by a small toy manufacturing company.
If the study is carried out by a salaried staff member or someone externally recruited, it is a
substantial expense to employ someone for this length of time.

Despite the advantages that life cycle costing inherent, there are also some disadvantages
in implementing this method. First, it is costly to be implemented. Since the life cycle costing
occurs from the beginning until the end of the product’s life, it will incur a lot of costs along
the process. The longer the life of the product, the more the cost it will incurred. Secondly, this
method relies heavily on the estimation of revenue that receives from market research and past
experience. If there is anything wrong with the sale figure, the whole system will not work.

Next, it is not flexible as the market demand keeps changing. The product life cycle expects
the market to precisely the same as the product gets to develop, produce, and sell to the market.
But everything changes from time to time, and it will impact the product life. Lastly, the value
of money that is spend toward the end of an asset’s life cycle may not have the same value as
at the beginning. Because the life cycle method spreads the cost of an asset over many years in
equal increments, a declining money value may happen.

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8.0 CONCLUSION AND RECOMMENDATION

Although there are a lot of different methods that can be used for allocating costs, there
are some that work better in certain areas than others. After doing this research, we found that
life cycle costing has great advantages. By looking at costs across the entire life cycle of a
product, the producers can evaluate the product at each phase of the life cycle. This will allow
them to minimize the initial costs and realize a return on their investment over a shorter period
of time.

In conclusion, the life cycle costing method has a lot of benefits that it can offers to
businesses especially manufacturing companies. This is because nowadays, there are many
companies that implement this method due to current market trending and also technology
development. Hence, it is a suitable method to be implemented. Besides, life cycle costing
helps companies to make better decision as it involves evaluation by stages.

Therefore, life cycle costing is very recommended to every company as it is very useful
and could help the company’s management in making their decision.

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