Life cycle costing and

environmental accounting
Overview
Life cycle costing is the third specialist cost accounting
technique we will consider. It is an approach that
accumulates costs over a product's entire life, rather than
calculating them for each accounting period through the
product's life. It is used to determine the total expected
profitability of a product over its entire life, from its design
and development stage, through its market introduction, to
its eventual withdrawal from the market. It is a costing
technique used primarily for planning lifetime costs and
profitability. It is not a technique for recording and
reporting historical costs of production and sales.
The product life cycle
Life cycle costs
Life cycle costing estimates the costs and revenues
attributable to a product over its entire expected life
cycle. The life cycle costs of a product are all the costs
attributable to the product over its entire life, from
product concept and design to eventual withdrawal
from the market.
Life cycle costing is the accumulation of costs over a
product's entire life.
Why calculate life cycle costs?
Life cycle costing has a different purpose from cost
accumulation systems that measure actual costs of
production and sales. Traditional costing systems are
intended to measure the cost of a product in each accounting
period, and the profit or loss that should be reported for the
product for that period.
The purpose of life cycle costing is to assess the total costs of a
product over its entire life, to assess the expected profitability
from the product over its full life. Products that are not
expected to be profitable after allowing for design and
development costs, or clean-up costs, should not be
considered for commercial development.
Why calculate life cycle costs?
Advanced manufacturing technology environment find
that approximately 90% of a product's life cycle costs are
determined by decisions made early within the cycle, at
the design stage. Life cycle costing is therefore
particularly useful for these organisations, to monitor
spending during the early stages of a product's life cycle
Between 70% and 90% of a product's life cycle costs are
determined by decisions made early in the life cycle, at
the design or development stage. Careful design of the
product and manufacturing and other processes will
keep cost to a minimum over the life cycle. .
example
Solaris specialises in the manufacture of solar panels.
It is planning to introduce a new slimline solar panel
specially designed for small houses. Development of
the new panel is to begin shortly and Solaris is in the
process of determining the price of the panel. It
expects the new product to have the following costs.
 Year 1 Year 2 Year 3 Year 4
Units 2000 15000 20000 5000
manufactured
and sold
$ $ $ $
R&D costs 1900000 100000
Marketing 100000 75000 50000 10000
cost
Production 500 450 400 450
cost per unit
Customer 50 40 40 40
service cost
per unit
Disposal of 300000
special
equipment
The Marketing Director believes that customers will
be prepared to pay $500 for a solar panel but the
Financial Director believes this will not cover all of the
costs throughout the life cycle.
Required Calculate the cost per unit looking at the
whole life cycle and comment on the suggested price.
Solution
Life cycle costs

R&D costs 2000

Marketing 235
Production 18000
Customer service 1700
Disposal 300
Total life cycle costs 22235
Total production units 42
Cost per unit 529.40
The total life cycle costs are $529.40 per solar panel,
which is higher than the price proposed by the
marketing director. Solaris will either have to charge a
higher price or look at ways to reduce costs.
It may be difficult to increase the price if customers
are price sensitive and not prepared to pay more. Costs
could be reduced by analysing each part of the costs
throughout the life cycle and actively seeking cost
savings; for example, using different materials, using
cheaper staff or acquiring more efficient technology.
Benefits
full life of a product
reasonable accuracy
life cycle concept results in earlier actions to generate
more revenue
Better decisions
encourages longer-term thinking and forward
planning,
Test your understandings
 A technique, which accumulates and tracks costs of
business function in value chain attributed to each
market, offering from R&D to final customer support,
is called
product life cycle
life cycle budgeting
life cycle costing
target costing
Life-cycle costing is
1. Is sometimes used as a basis for cost planning and
product pricing.
2. Includes only manufacturing costs incurred over the
life of the product.
3. Includes only manufacturing cost, selling expense,
and distribution expense.
4. Emphasizes cost savings opportunities during the
manufacturing cycle.
The company plans to produce 200,000 units and price the product at 125% of
the wholelife unit cost. Thus, the budgeted unit selling price is"

A company�s product has an expected 4-year life cycle from research,

development, and design through its withdrawal from the market. Budgeted
costs are"
Upstream costs (R&D, design) $2,000,000
Manufacturing costs 3,000,000
Downstream costs (marketing, 1,200,000
distribution, customer service)
After-purchase costs 1,000,000
1. $15
2. $31
3. $36
4. $45
Environmental accounting
Environmental issues are becoming increasingly
important in the business world. Businesses are
responsible for the environmental impact of their
operations and are becoming increasingly aware of
problems such as carbon emissions. The growth of
environmental issues and regulations has also brought
greater focus on how businesses manage and account for
environmental costs. The focus of this chapter is on
methods of providing information to management on
environmental costs. It does not deal with environmental
reporting to shareholders and other stakeholders.
Importance
On 20 April 2010, multinational oil company BP's
Deepwater Horizon rig exploded off the coast of the US
state of Louisiana, killing 11 workers. BP chairman Carl-
Henric Svanberg was invited to meet US President Barack
Obama amid concerns that the company did not have
enough cash to pay for the clean-up operation and
compensation for those affected – estimated at $32.2
billion. The reputation of the global BP brand was
seriously damaged.
definition
Environmental management accounting (EMA) is the
generation and analysis of both financial and
nonfinancial information in order to support internal
environmental management processes.
Environmental impact on business
Pressure group campaigns can cause damage to
reputation
energy and environmental taxes, such as the UK's
landfill tax
poor environmental performance may face increased
cost of capital
Environmental legislation
Achieving business and environmental
benefits
1. Integrating the environment into capital expenditure
decisions
2. Understanding and managing environmental costs
3. Introducing waste minimization schemes
4. Understanding and managing life cycle costs
5. Measuring environmental performance.
6. Involving management accountants in a strategic
approach (green accounting team)
Defining environmental costs
The US Environmental Protection Agency makes a
distinction between four types of cost.
1. Conventional costs
2. Potentially hidden costs
3. Contingent costs (clean up costs)
4. Image and relationship cost(costs of preparing
environmental reports)
Environmental costs
They can be internal as well as external
The internal environmental costs for an organisation
include, the costs of preventing environmental damage
External environmental costs are costs that an
organisation causes, but which are suffered by others for
example the general public. For example, unless an
organisation is punished for causing environmental
damage, such as pollution from toxic air emissions,
society as a whole may bear the cost of the pollution and
any clean-up operation
Identifying environmental costs
Consumables and raw materials
 Transport and travel
 Waste
 Waste and effluent disposal  Water consumption 
Energy
Controlling environmental costs
ISO 14000 must comply
An environmental policy statement
An assessment of environmental aspects and legal and
voluntary obligations
A management system
Internal audits and reports to senior management
A public declaration that ISO 14001 is being complied
with
Accounting for environmental costs
input/output analysis,
flow cost accounting
environmental activity-based costing
environmental life cycle costing
Input/output analysis
at a simple level, it measures the input to a production
process or system, and the output from the system.
Any difference between the amount input and the
amount input is 'residual', which is called 'waste'.
Flow cost accounting
development from input/output analysis
A distinction is made between: (a) Positive products:
this is good output (b) Negative products: this is the
measurement of waste
A distinction is made between: (a) Positive products:
this is good output (b) Negative products: this is the
measurement of waste
Positive products + Negative products = Total input
Environmental activity-based costing
 Activity-based costing (ABC) '… represents a method of managerial
cost accounting that allocates all internal costs to the cost centres and
cost drivers on the basis of the activities that caused the costs'
(UNDSD, 2003).
 The main challenge with environmental activity-based costing is to:
 (a) Identify the hidden environmental costs and link them to
'environmental activities'
 (b) Charge the costs of each environmental activity to individual
product costs according to the amount that each product is responsible
for the environmental activity
Environmental life cycle costing
 Under this method of environmental cost accounting, environmental
costs for a product are considered from the design stage of the product
right up to the end of life costs, such as decommissioning and removal.
 By identifying the environmental costs of a product over its entire
expected life, including the costs of clean-up and disposal at the end of
the product's life, management can make a decision about whether the
environmental costs are acceptable, or they can consider ways of
reducing the costs to a more acceptable level.
 These decisions can be made before the product is actually brought
into production.
Further reading
https://
www.accaglobal.com/pk/en/student/exam-support-re
sources/professional-exams-study-resources/p5/techn
ical-articles/environmenta-management.html