Atkinson c08

Measuring and Managing
Life-Cycle Costs
Chapter 8
2012 Pearson Prentice Hall. All rights reserved.
Total-Life-Cycle Costing
Total-life-cycle costing (TLCC) is the approach

companies use to understand and manage all costs
incurred in:
Research, development and engineering cycle
Manufacturing cycle
Post-sale service and disposal cycle
Also known as managing costs from the cradle to

the grave
Total-Life-Cycle Costing
Each part of a companys value chain is typically

managed by a different organizational function
Companies need a total-life-cycle perspective that

integrates the tradeoffs and performance over time
and across functional units
Research, Development, and

Engineering (RD&E) Stage
The RD&E Stage has three substages:

Market research
Product design
Product development
By some estimates, 80% to 85% of a products

total life costs are committed by decisions made in
the RD&E stage of a products life
Manufacturing Stage
This stage offers little opportunity for engineering

decisions to reduce costs since most costs have
already been determined during the RD&E stage
Methods to help improve product costs include:
Product and process costing
Facilities layout
Kaizen
Benchmarking
Just-in-time manufacturing
Post-Sale Service and

Disposal Stage
The service stage begins once the first unit of a

product is in the hands of the customer
Disposal occurs at the end of a products life and

lasts until the customer retires the final unit of a
product
The costs for service and disposal are committed

in the RD&E stage
The Service Stage
The service stage typically consists of three

substages:
Rapid growth
From the first time the product is shipped through the

growth stage of its sales
Transition
From the peak of sales to the peak in the service

stage
Maturity
From the peak in the service stage to the time the last
shipment is made to a customer
The Disposal Stage
Disposal occurs at the end of a products life and

lasts until the customer retires the final unit of a
product
Disposal costs often include those associated with
eliminating any harmful effects associated with
the end of a products useful life
Products whose disposal could involve harmful
effects to the environment, such as nuclear waste
or toxic chemicals, often incur very high costs
Life-Cycle Costs
The following table illustrates four types of

products and the percentage of life-cycle costs
incurred in each cycle
RD&E
Manufacturing
Service and Disposal
Average Years in Life
Cycle
Combat
Jets
Commercial
Aircraft
Nuclear
Missiles
Computer
Software
21%
45%
34%
20%
40%
40%
20%
60%
20%
75%*
*
25%
30
25
2 to 25
Target Costing
An approach that considers manufacturing costs

early in the design decisions
Helps engineers design new products that meet

customers expectations and that can be
manufactured at a desired cost
An important management accounting method for

cost reduction during the design stage that helps
manage total-life-cycle costs
The Traditional Method
Begins with market research into customer

requirements followed by product specification
Companies engage in product design and

engineering and obtain prices from suppliers
After the engineers and designers have determined

product design, cost is estimated
Target Costing Method
Although the initial steps appear similar to

traditional costing, there are some notable
differences:
Marketing research is customer-driven
Project engineers attempt to design costs out of the
product before design and development end and

manufacturing begins
The total-life-cycle concept is used by making it a
key goal to minimize the cost of ownership of a
product over its useful life
Engineers set an allowable cost that enables the

targeted product profit margin to be achieved at a
price customers are willing to pay
The target profit margin results from a long-run

profit analysis, often based on return on sales
The target cost is the difference between the target

selling price and the target profit margin
Once the total target cost has been set, the

company must determine target costs for each
component
The value engineering process includes
examination of each component of a product to
determine whether it is possible to reduce costs
while maintaining functionality and performance
Several iterations of value engineering are usually
needed before the final target cost is achieved
Two other differences characterize the process:

Throughout the entire process, cross-functional
product teams made up of individuals representing

the entire value chain guide the process
Suppliers play a critical role in making target
costing work
Cost Analysis
Cost analysis requires five sub-activities:

1. Develop a list of product components and
functions
2. Perform a functional cost breakdown
3. Determine the relative importance of customers
requirements
4. Relate features to functions
5. Develop relative functional rankings
Conduct Value Engineering
Value engineeringorganized effort directed at

the various components for the purpose of
achieving these functions at the lowest overall cost
without reductions in required performance,
reliability, maintainability, quality, safety,
recyclability, and usability
Conduct Value Engineering
Two sub-activities:
Identify components for cost reduction by
computing a value index (ratio of the value to the

customer and the percentage of total cost devoted
to each component)
Generate cost reduction and function enhancement
ideas
Concerns about Target Costing
Lack of understanding of the target costing

concept
Poor implementation of the teamwork concept
Employee burnout
Overly long development time
Break-Even Time (BET)
BET measures the length of time from the

projects beginning until the product has been
introduced and generates enough profit to pay
back the investment originally made in its
development
Break-Even Time (BET)
BET brings together in a single measurement three

critical elements in an effective and efficient
product development process:
BET requires tracking the entire cost of the design
and development process so that the company can

recover its total investment
BET stresses profitability and encourages cross
functional teamwork to meet the customer needs
BET is denominated in time and encourages the
launch of new products faster than the competition
so that higher sales can be earned sooner to repay
the product development investment
Innovation Measures on the

Balanced Scorecard
Examples of financial measures:

Target cost
Percentage of sales from recently launched
products
Gross margins from new products
Innovation Measures on the

Balanced Scorecard
Examples of nonfinancial measures:

Market Research and Generation of New Product
Ideas
Number of new projects launched based on

customer input
Number of new value-added services identified
Design, Development, and Launch of New
Products
Number of patents
Total RD&E time: from idea to market
Environmental Costing
Environmental remediation, compliance, and

management have become critical aspects of
enlightened business practice
Environmental costing involves:
Selecting suppliers whose philosophy and practices
in dealing with the environment match the buyers

Disposing of waste products during the production
process
Incorporating post-sale service and disposal issues
into management accounting systems
Controlling Environmental
Costs
Activity-based costing can be easily applied to the

measurement, management, and reduction of
environmental costs
Identify the processes that cause environmental
costs
Assign the organizational costs associated with
these processes
Assign those costs to individual products,
distribution channels, and customers
Controlling Environmental
Costs
Only when managers and employees become

aware of how the activities in which they engage
create environmental costs will they be able to
control and reduce them
Environmental costs fall into two categories:

Explicit costs
Implicit costs

Atkinson c08

Uploaded by

Copyright:

Available Formats

You might also like

Atkinson c08

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Atkinson c08

Uploaded by

Copyright:

Available Formats

Measuring and Managing

2012 Pearson Prentice Hall. All rights reserved.

Total-life-cycle costing (TLCC) is the approach

Also known as managing costs from the cradle to

2012 Pearson Prentice Hall. All rights reserved.

Each part of a companys value chain is typically

Companies need a total-life-cycle perspective that

2012 Pearson Prentice Hall. All rights reserved.

Research, Development, and

The RD&E Stage has three substages:

By some estimates, 80% to 85% of a products

2012 Pearson Prentice Hall. All rights reserved.

This stage offers little opportunity for engineering

2012 Pearson Prentice Hall. All rights reserved.

Post-Sale Service and

The service stage begins once the first unit of a

Disposal occurs at the end of a products life and

The costs for service and disposal are committed

2012 Pearson Prentice Hall. All rights reserved.

The Service Stage

The service stage typically consists of three

From the first time the product is shipped through the

From the peak of sales to the peak in the service

The Disposal Stage

Disposal occurs at the end of a products life and

2012 Pearson Prentice Hall. All rights reserved.

The following table illustrates four types of

2012 Pearson Prentice Hall. All rights reserved.

An approach that considers manufacturing costs

Helps engineers design new products that meet

An important management accounting method for

2012 Pearson Prentice Hall. All rights reserved.

The Traditional Method

Begins with market research into customer

Companies engage in product design and

After the engineers and designers have determined

2012 Pearson Prentice Hall. All rights reserved.

Target Costing Method

Although the initial steps appear similar to

product before design and development end and

Target Costing Method

Engineers set an allowable cost that enables the

The target profit margin results from a long-run

The target cost is the difference between the target

2012 Pearson Prentice Hall. All rights reserved.

Target Costing Method

Once the total target cost has been set, the

2012 Pearson Prentice Hall. All rights reserved.

Target Costing Method

Two other differences characterize the process:

product teams made up of individuals representing

2012 Pearson Prentice Hall. All rights reserved.

Cost analysis requires five sub-activities:

2012 Pearson Prentice Hall. All rights reserved.

Conduct Value Engineering

Value engineeringorganized effort directed at

2012 Pearson Prentice Hall. All rights reserved.

Conduct Value Engineering

computing a value index (ratio of the value to the