1. 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

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

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

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

5. 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

6. 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.

7. 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

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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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. √ √ √ √

16. 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 √ √

17. 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)

18. Appendix 1

19. Appendix 2