CIMA P2 Advanced Management Accounting First Intro slide – change details to your own For exams in 2016 江西财经大学会计学院 吉伟莉 499159596@qq.com

Chapter 3 Cost planning Learning curve Life cycle costing First Intro slide – change details to your own

Product life cycle (market life) Life cycle costing 1 Maturity Decline Growth Development Introduction Product life cycle (market life)

Life cycle costing 2 Life cycle costing The profiling of cost over a product’s life, including the pre-production stage

Relating to the Value Chain R&D Design Production Selling Distribution Customer service FINANCE IT PROCUREMENT Support cost Downstream costs: Costs that occur after production Include: Sales & Marketing, credit control & Customer service Upstream Costs: Costs that occur before production, applies to both products and services Include: Research & development and design costs

Relating to the Value Chain Production costs : The raw materials and components ( Direct Material costs ) Labour costs ( Direct Labour ) All Indirect manufacturing costs ( Manufacturing overhead ) Note: In traditional cost accumulation systems inventory costs include only production costs. All other costs, are called PERIOD COSTS. The true profitability of the product cannot be accurately assessed.

Life cycle costing 3 Stages in the life cycle Introduction Growth Maturity Decline The stage a product is at in its life cycle will affect the returns expected

Life cycle costing 4 Performance measures Introduction Cash – net user Return on capital employed – not important Growth – vital Profit – not expected Growth Profit – important

Life cycle costing 5 Performance measures continued Maturity Cash – generator Return on capital employed – important Growth – grow with new uses Profit – important Decline Growth – negative growth Profit – very important

Life cycle costing 6 How to maximise the return over the product life cycle Design costs out of products Minimise the time to market Minimise breakeven time Maximise the length of the life span Minimise product proliferation

Life cycle costing 7 Impact on marketing strategies As a product progresses through its life cycle, it faces different challenges and opportunities These will require changes in the marketing mix and alternative marketing strategies Example: During the maturity stage, incentives should be given to entice competitors’ customers to switch

Life cycle costing 8 Traditional management accounting systems v life cycle costing Traditional management accounting systems Based on the financial year and so dissect the product life cycle into a series of annual sections Profitability is thus assessed on an annual basis Such systems total all non-production costs and record them as a period expense They write off R&D expenditure against revenue from existing products Therefore existing products seem less profitable and are scrapped too quickly

Life cycle costing 9 Traditional management accounting systems v life cycle costing continued Life cycle costing This approach tracks and accumulates a product’s actual costs and revenues over the entire product life cycle This means that a product’s total profitability can be determined It traces non-production costs to individual products over complete life cycles

Life cycle costing 10 Benefits of life cycle costing Full understanding of individual product profitability More accurate feedback information Cost reduction/minimisation and revenue expansion opportunities more apparent Increased visibility of non-production costs

Life cycle costing 11 Quick quiz 1 The following statements have been made about life cycle costing. Which of the statements is/are true? Life cycle costing can be applied to products with a short life cycle. Product life cycle costing is not particular well-suited for use as part of budgetary control systems. Life cycle costing is more useful for planning than for control. Most of the life cycle costs for a product are determined by decisions taken in the early stage of a product’s life cycle. A product is usually most profitable during the growth phase of its life cycle. √ √ √ √

Life cycle costing 12 Quick quiz 2 In which of the following ways might financial returns be improved over the life cycle of a product? Maximising the breakeven time Minimising the time to market Minimising the length of the life cycle Minimising product proliferation √ √

Life cycle costing 13 Customer life cycle Aim is to extend the life cycle of a particular customer Do this by encouraging loyalty (e.g. loyalty cards) Customers become more profitable over their life cycle (e.g. bank customers)

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