Strategic Cost Management

Second Term, A. Y. 2024-2025

School of Accountancy, Business, and Management

National University – Laguna

Prepared by:

Abordo, Kristan Kyle

Andaya, Jhon Carlo E

Leal, Jure Jerrus

Reyes, Chihiro Marizekiel T.

Roldan, Kathleen Joy

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 LIFE CYCLE COSTING

PRODUCT LIFE CYCLE

Product life cycle considers two aspects:
1.​ The cost life cycle
2.​ The sales life cycle

Cost life cycle - includes the sequence of activities resulting in a firm’s costs from a product’s
research and design to its distribution and customer service.

❖​ Three Methods in analyzing the cost life cycle: Life-Cycle Costing; Target Costing;
Theory of Constraints.

Life Cycle Costing - a management technique used to provide a long-term oversight towards
the entire life cycle of a product. With that said, this technique considers the product’s total
cost over its entire life cycle.

Three Components of Life Cycle Cost:

1.​ Upstream Costs
2.​ Manufacturing Costs
3.​ Downstream Costs

●​ UPSTREAM
Upstream Costs- pertains to the costs incurred prior to the start of production.
❖​ Research and Development
❖​ Design

Specialized industrial and medical equipment, as well as computer software, are industries with
high upstream costs.

Under upstream costs, designing stage has four common models:

❖​ Basic Engineering- this strategy allows product designers to operate independently
from marketing and manufacturing to create a design based on plans and specifications

❖​ Prototyping- this process involves creating functional models of the product and
evaluated by engineers and trial customers.

Life Cycle Costing - Page 1

❖​ Templating- this design process involves scaling up or down an existing product to
meet the standards of the new product.

❖​ Concurrent Engineering- also known as simultaneous engineering, is a significant new

approach that integrates product design, manufacturing, and marketing throughout the
product's lifecycle.

●​ MANUFACTURING
Is the sum of costs of all resources consumed in the process of making a product. The
manufacturing cost is classified into three categories: direct materials cost, direct labor
cost, and manufacturing overhead. It is a factor in the total delivery cost. It is a pivotal
factor in determining the total delivery cost and has a significant impact on cost control,
pricing decisions, and overall profitability for a company.

❖​ Production
Production cost refers to all of the expenses associated with a company
conducting its business while manufacturing cost represents only the expenses
necessary to make the product. Whereas production costs include both direct
and indirect costs of operating a business, manufacturing costs reflect only
direct costs.

●​ DOWNSTREAM COSTS

Marketing or selling expenses- include all costs necessary to secure customer orders
and get the finished product or service into the hands of the customer.

Examples:
❖​ Packaging
❖​ Shipping
❖​ Samples
❖​ Promotion
❖​ Advertising

Service and Warranty- These costs include all expenses related with providing
after-sales services, fulfilling warranty obligations, and ensuring customer
satisfaction.

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 Examples:
❖​ Recalls
❖​ Product Liability
❖​ Customer Support

LIFE CYCLE COSTING AND PRICING

Illustrative Case 1: Life-Cycle Costing and Pricing

Star Communications Technologies, Inc., has introduced a new phone so small that it can be
carried in a wallet. Star invested P400,000 in research and development for the technology,
and another P800,000 to design and test the prototypes. Star predicts a four-year life cycle for
this model and gathered this cost data for the wallet phone:

Monthly Fixed Cost Variable Costs

Manufacturing costs P25,000 P20

Marketing costs 20,000 5

Customer Costs 3,000 8

Distribution costs 5,000 15

Sales Prediction:

For Price of P150 - Average annual sales of 80,000 units

For Price of P180 - Average annual sales of 60,000 units

For Price of P225 - Average annual sales of 48,000 units

Therefore, If the price of a wallet phone is P225, Star will have to increase the research and
development costs by P100,000 and the prototyping costs by P400,000 to improve the model
for the higher price. Fixed customer service costs also would increase by P500 per month and
variable distribution costs would increase by P5 per unit to improve customer service and
distribution at the P225 level. At the lowest price level of P150, fixed marketing costs would be

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reduced by P5,000 per month because the low price would be the principal selling feature. In
addition, a notable difference between the pricing of life cycle costing and sales life costing is
the former’s consideration of a product’s overall costs rather than how it does in its sales.

References

Strategic Cost Management (2019-2020 Edition) Ma. Elenita Balatbat Cabrera & Gilbert
Anthony M. Cabrera

Cost Accounting and Control (2022 Edition) Norma D. De Leon, Ellery D. De Leon & Guillermo
M. De Leon Jr.

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