Life Cycle Costing
Life Cycle Costing
The life cycle costing method accumulates all the costs associated with the production of the specific product from the beginning to the end of the production. The life cycle costing method tells and assists to the management of the business in making the price of the product more competitive as compared to the competitors in the market. The life cycle costing method accumulates and tracks all the costs to be incurred in the production of the new project before decision making. The life of any product is divided into five stages according to the life cycle costing method. (Haider, 2011)
The first step of the life cycle costing method is to perform detailed research and the development planning of the product. For the success of any product, it is very important to analyze the sustainability and the probability of the success of the product. A detailed market review and the demands of the customers are analyzed at this stage. (Haider, 2011)
The second stage of the life cycle costing method is the introduction of the product. At this stage the management of the business introduces their product in the market. The typical methods of introducing the product are to place products in the markets and proper advertisement of the product. (Haider, 2011)
The third stage of the life cycle costing method is the growth in sales of the product. At this stage the business ensure that the production department meets the requirements according to the demand. If the research and the publicity of the product are performed properly, then it is highly probable that the growth in the sales of the product will be high. (Haider, 2011)
The fourth stage of life cycle costing method is the maturity of the product. At this stage the increase in the sales of the product starts to slow and ultimately the sales start to reduce as compared to the growth stage. The main reason of this decline is the effect of competitors and the technological factors. However, at this stage, the management of the company can include any renovation in the product to increase the life span on the product. (Haider, 2011)
The last step of life cycle costing method is the decline of the product. At this stage the profits associated with the product falls at the minimum level and the management decides to stop the production of the product. (Haider, 2011)
The European Exhaust & Catalogue (EEC) must adopt the life cycling costing method now to differentiate between the profitability and the sustainability of their different products. The European Exhaust & Catalogue (EEC) is producing 4,500 different products and it is highly probable that the high portion of these products will be loss makers for the organization. Similarly, it is highly probable that the fixed cost of the European Exhaust & Catalogue (EEC) is not attributed to all the different cost centers and cost drivers. Therefore, the monument of the European Exhaust & Catalogue (EEC) must adopt the life cycle costing method to accumulate the overhead costs properly to find the loss maker products of the business. (Carter & Keeler, 2008)
The management of the European Exhaust & Catalogue (EEC) can start using the life cycle costing method on the short life products and the long life products easily. To implement their strategy on the short life product, they must identify and analyze the production level of the sales done by the vehicle manufacturing company. The management of the company must link their production forecast with the number of sales of the vehicle manufacturing company before installing any machinery or making new production plant. Moreover, the long life products, such as small spare parts, the management of the business must concentrate on the proper revised research and development of these products to maximize the profitability of long life products. (Carter & Keeler, 2008)
The main difference between the life cycle costing and the full costing method is that in full costing method or absorption costing method the cost of the product is determined on the basis of fixed and variable costs only. Moreover, the fixed costs are absorption is done on the basis of either machine hours or labor hours, which ultimately affects the overall cost of the manufactured products. However, in the case of life cycle costing method the life cycle costing is used to determine the cost of the product after accumulating the entire life expenses of the product. Moreover, the classification or the division of the fixed cost in the life cycle costing method is more appropriate than the full costing method. In case of different products, the life cycle method gives the more reliable distribution of the overhead costs of the business. (Ghali, Donaldson & Manns, 2009)
The variable costing method is entirely based on the direct or variable costs associated with the production of the products. This approach does not include the fixed overheads and other costs in the identification of the selling price of the product. Therefore, it is highly probable that without accumulating the fixed costs, the management of the business can assign wrong selling price and suffer losses. However, in the life cycle costing, the most of the time of the management is consumed at the planning stage which reduces the chances of error. (Ghali, Donaldson & Manns, 2009)
In the target costing, the management of the business set a selling price before the actual production and then tries to produce the product which costs lower than the selling price. This approach of the costing can leads to the poor product quality. The management can set the selling price of the product according to the expectations of the customers. However, it is highly probable that the quality of the product reduces to meet the selling price. In the case of life cycle costing, the detailed research and development is done at the initial stages. Therefore, the costing method and price selling standards are more accurate in the case of competition in the market. (Ghali, Donaldson & Manns, 2009)
When the business is producing the multiple products, then the management of the business uses the activity based costing method to determine the actual fixed and variable cost consumed by the product. The advantage of using the activity based costing is that it can divide the overhead portion of the business in the product on the basis of cost drivers, which is more appropriate than other costing methods. However, it is very time consuming to determine the values of the cost drives. In the case of life cycle method, the method is ideal for the one product only because it focuses on the life span of the one single product. Therefore, if the business has different products, then it is highly probable that the business will face expenses on the research and development stage of each product separately. (Ghali, Donaldson & Manns, 2009)
The advantage of using life cycle costing for the European Exhaust & Catalogue (EEC) is that the products they are producing depends on the production of the other companies. They are producing the spare parts of the cars and it is highly probable that the car manufacturing companies can stop using the technology and the standards in the coming years. Therefore, by adopting the life cycle costing method, the management of the EEU can analyze the life of their products and the entire production department life on the basis of life cycle costing method. In the industry of vehicles, it is in a view that to produce specific vehicle of the specific product of the vehicle, the company install a new plant to produce the specific product. Moreover, the management of EEC can increase the profitability of the business by implementing more sound research and development standards in the organization. (Carter & Keeler, 2008)
The main disadvantage of the life cycle costing method for the European Exhaust & Catalogue (EEC) is that the nature of the business is very fast and it is highly probable that the introduction of the new product from the vehicle producing company can affect the sales of the spare parts of the European Exhaust & Catalogue (EEC). Therefore, in these circumstances, the management of the business must not spend a lot of time at the research and development stage. They must adopt the standards of the vehicle manufacturing company and starts the promotion and production as soon as possible to capture the market share. Moreover, any delay in the production will help the competitors, which can reduce the profits of the business. (Johnston)
References
Haider, H. (2011, January 18). Life Cycle Costing. Retrieved December 14, 2014, from
http://ezinearticles.com/?Life-Cycle-Costing&id=5743308
Johnston, K. (n.d.). The Disadvantages of Using a Life Cycle Costing Concept. Retrieved
December 14, 2014, from http://smallbusiness.chron.com/disadvantages-using-life-cycle-costing-concept-37919.html
Carter, T., & Keeler, A. (2008). Life-cycle cost–benefit analysis of extensive vegetated roof
systems. Journal of environmental management, 87(3), 350-363.
Ghali, W. A., Donaldson, C., & Manns, B. J. (2009). The impact of using different costing
methods on the results of an economic evaluation of cardiac care: microcosting vs gross‐costing approaches. Health economics, 18(4), 377-388.
