Life cycle costing

Life cycle
It refers the time period in which a particular product remains popular in the market and is in demand by
the customers.

Life cycle costing 1 By:- Haris Hanif

Q.1) The following information available of ABC limited and is about to operate lifecycle costing.
Year 1 Year 2 Year 3
Units made and sold 1,500 5,000 1,500
$ $ $
Variable production cost per unit 20 15 12
Fixed production cost 100,000 100,000 50,000
marketing and training cost 60,000 35,000 20,000

Research and development cost $180,000

What is life cycle cost per unit?

Q.2) ABC Limited had estimated life 2 years of the product and at the end of life, decommissioning cost is
expected to occur amount $70,000 and following details are available:-

Year -1 Year - 2
Units 2,000 8,000
$ $
Production cost 100,000 262,500
Marketing cost 65,000 22,000
R & D cost 300,000 -
Training cost 10,000 5500

Required:-
Calculate lifecycle cost per unit.
Q.3) The Company had estimated 4 years life of the product, depreciation charge per year amounted
$28,500 of the machine whose life is four years.

 Total four years production cost $600,000.

 Variable selling overheads $5 per unit throughout the life.
 Training cost over a life totalling $50,000.
 Marketing and other costs including R & D cost amounted $300,000.
 Production and sales units Y1 = 2,000 Y2 = 2,500 Y3 = 3,000 Y4 = 5,000

Required:-

Calculate lifecycle cost per unit.

Life cycle costing 2 By:- Haris Hanif

Q.4) Wargrin has developed a brand new game called Stealth and this has the following budgeted
performance figures.
The selling price of Stealth will be a constant $30 per game. Analysis of the costs show that at a volume of
10,000 units a total cost of $130,000 is expected. However at a volume of 14,000 units a total cost of
$150,000 is expected.
If volumes exceed 15,000 units the fixed costs will increase by 50%.
Stealth’s budgeted volumes are as follows:
Year 1 Year 2 Year 3
Sales volume 8,000 units 16,000 units 4,000 units
In addition, marketing costs for Stealth will be $60,000 in year one and $40,000 in year two.
Design and development costs are all incurred before the game is launched and has cost $300,000 for
Stealth.
Calculate the profit of the game stealth over the life.
Good strategies in a lifecycle
- Minimising the breakeven time as much as possible.

- Taking minimum time to launch the product after the completion of research and development.

- Introducing the innovative features during the lifecycle of the product, like in maturity stage to increase
the life span of the product.

- Launching the product in different other markets.

- Approximately 70% - 90% of the costs are estimated in advance so company should control the cost
in advance by making suitable strategies.

Life cycle costing 3 By:- Haris Hanif

Q.5) VOLT CO (Exam March/June – 2019)
Volt Co generates and sells electricity. It operates two types of power station: nuclear and wind.

The costs and output of the two types of power station are detailed below:

Nuclear station
A nuclear station can generate 9,000 gigawatts of electricity in each of its 40 years of useful life. Operating costs are
$486m per year. Operating costs include a provision for depreciation of $175m per year to recover the $7,000m cost
of building the power station. Each nuclear station has an estimated decommissioning cost of $12,000m at the end
of its life. The decommissioning cost relates to the cost of safely disposing of spent nuclear fuel.

Wind station
A wind station can generate 1,750 gigawatts of electricity per year. It has a life-cycle cost of $55,000 per gigawatt
and an average operating cost of $40,000 per gigawatt over its 20-year life.

1 What is the life-cycle cost per gigawatt of the nuclear station (to the nearest $’000)?

(a) $54,000 (b) $73,000 (c) $87,000 (d) $107,000

2 Which of the following will decrease the total life-cycle cost of a nuclear station?

(1) Increasing the useful life of the station

(2) Reducing the decommissioning cost

(a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2

3 How would the disposal cost of spent nuclear fuel be categorised in environmental management accounting
(EMA)?

(a) A prevention cost (b) A detection cost (c) An internal failure cost (d) An external failure cost

4 If Volt Co sets a price to earn an operating margin of 40% over the life of a wind station, what will be the total
lifetime profit per station (to the nearest $m)?

(a) $35m (b) $408m (c) $560m (d) $933m

5 Which of the following are benefits of life-cycle costing for Volt Co?

(1) It facilitates the designing out of costs at the product development stage
(2) It can encourage better control of operating costs over the life cycle
(3) It gives a better understanding of the causes of overhead costs
(4) It provides useful data for short-term decision-making

(a) 1, 2 and 3 (b) 1 and 2 only (c) 1 and 4 (d) 2, 3 and 4

Life cycle costing 4 By:- Haris Hanif

Q.6) TICK the correct and CROSS the wrong statements.

1 The companies decide the best possible price in the Introduction phase of life cycle.
2 In the principle of life cycle costing, the cost per unit involves the production cost only.
3 Life cycle costs cannot be estimated for services, customers and projects and for
physical products.
4 If the company will spend more satisfactory amount in Research and Development,
then it may reduce the expected warranty claims in later years of the life cycle.
5 In the principles of the life cycle, the expected performance assessment before the
launch of the product is based on the Net profit calculated over the entire life from
“cradle to grave.”
6 The company should ensure its sustainability in the market by bringing the
modifications in the product in the growth phase of product life cycle.
7 The techniques of life cycle costing and target costing can be combined, to plan for
achieving certain levels of cost at different stages of the product's life cycle. Both are
essentially forward-looking techniques of costing.
8 Approximately 90% of the costs can be estimated at an early phase of the product life
cycle and so careful attention should be given to minimise the costs of the life.
9 Life cycle costing principles specially in service business determines the Research &
Development cost in the same way as in the manufacturing organisations.
10 Life cycle with respect to customers, that is, customer life cycle can be increased by
issuance of “loyalty cards” to ensure the retention of the particular customers or
particular class of customers.

ANSWERS:

1 T
2 F
3 F
4 T
5 T
6 F
7 T
8 T
9 F
10 T

Life cycle costing 5 By:- Haris Hanif