F5 Performance Management

2 Section A: Specialist Cost and Management Accounting Techniques Designed to give you knowledge and application of: A1. Activity based costing A2. Target costing A3. Life-cycle costing A4. Throughput accounting A5. Environmental accounting A1. Activity based costing A2. Target costing A3. Life-cycle costing A4. Throughput accounting A5. Environmental accounting

3 A3: Life-cycle costing Learning outcomes  Identify the costs involved at different stages of the life-cycle. [2]  Derive a life-cycle cost in manufacturing and service industries. [2]  Identify the benefits of life-cycle costing. [2]

4 The costs involved at different stages of the life-cycle Life-cycle costing refers to the system that tracks and accumulates every individual cost which is incurred during the whole life cycle of a product, starting from its initial planning stage to the post sales service and abandonment stage.

5 Costs committed and costs incurred Costs are incurred when a resource is used or sacrificed Costs that have not incurred, but will incur in the future on the basis of decisions that have already been taken Cost incurred Present (decision ) Cost committed Future (cost) About 80% of the life-cycle costs of a product are committed at the planning and design stage The actual cost of a product is built up mostly in the manufacturing stage & service & abandonment stage

6 Performance Cost reduction results in Profit Benefits of life-cycle costing Pricing:  Provides input for pricing  Helps to recover the entire costs of the life-cycle. Performance management:  Helps management to identify the areas where cost reduction is possible.  Tries to reduce product development time in order to reduce overall cost of production.  Life-cycle analysis highlights committed costs & gives scope to control them at the initial planning stage. Decision making:  Provides premises for decision making regarding product introduction, product mix and discontinuation of products.  Is a way to enhance the control of manufacturing costs. Refer to Self Examination Question 3 on page 38

7 RECAP  Identify the costs involved at different stages of the life-cycle. [2]  Derive a life-cycle cost in manufacturing and service industries. [2]  Identify the benefits of life-cycle costing. [2]