PRODUCT LIFECYCLE COSTING

PRODUCT LIFE CYCLE COSTING
4 STAGES
INTRODUCTION
GROWTH
MATURITY
DECLINE

1. STRATEGIC COST MANAGEMENT
PRODUCT LIFECYCLE COSTING
SNEKA R S
22PBM048

2. LIFECYCLE COSTING
"Life cycle costing tracks and
accumulates costs and revenues
attributable to each product or
project over the entire product life
cycle"

3. PRODUCT LIFECYCLE COSTING
The product life cycle refers to the stages that a product goes through
from its introduction to the market, growth, maturity, and eventual decline
and the cost incurred in each and every stage is known as
"Product Lifecycle Costing"

4. PHASES OF PRODCUT LIFECYCLE
DEVELOPMENT
INTRODUCTION
GROWTH
1.
2.
3.
4.MATURITY
5.DECLINE

5. High level of setup costs.
Research and Development (R&D),
Product Design and Building of
production facilities.
No revenue generated.
Target costing may be used in
combination with life cycle costing.
PRE-PRODUCTION / PRODUCT
DEVELOPMENT STAGE
1.

6. The product is introduced to the market.
Potential customers will be unaware of the product or service.
Success depends upon awareness and trial of the product.
Extensive marketing and promotion costs.
A company may be able to choose its pricing strategy for the
new product.
MARKET PENETRATION
MARKET SKIMMING
1.
2.
2. LAUNCH / MARKET DEVELOPMENT STAGE

7. Marketing and Promotion will continue
through this stage.
The product gains a bigger market as
demand builds up. Sales revenue increases
and the product begins to make a profit.
Unit costs fall as fixed costs are
recovered over greater volumes.
3.GROWTH STAGE

8. Initially profits will continue to increase, as
initial setup and fixed costs are recovered.
Marketing and distribution economies are
achieved.
Eventually, the growth in demand for the
product will slow down as firms compete for
the limited new customers remaining and it
will enter a period of relative maturity.
The product may be modified or improved,
as a means of sustaining its demand.
4.MATURITY STAGE

9. The market will have bought enough of the product and it will
therefore reach saturation point.
Marketing costs are usually cut as the product is phased out.
Demand will start to fall. Production economies may be lost as
volumes fall.
Eventually it will become a loss-maker and this is the time
when the organization should decide to stop selling the
product or service.
Meanwhile, a replacement product will need to have been
developed, incurring new levels of R&D and other product
setup costs.
5.DECLINE STAGE

10. PHASES IN PRODUCT LIFE CYCLE

11. EXAMPLE

12. ABC Co specializes in the manufacture of solar panels. It is planning to
introduce a new slimline solar panel specially designed for small houses.
Development of the new panel is to begin shortly and Solaris is in the
process of determining the price of the panel. It expects the new product
to have the following costs.
EXAMPLE

13. The Marketing Director believes that customers will be prepared to pay Rs. 500
for a solar panel but the Financial Director believes this will not cover all of the
costs throughout the lifecycle.
Calculate the cost per unit looking at the whole life cycle and comment on the
suggested price.

14. SOLUTION

15. The total lifecycle costs are Rs.529.40 per solar panel which is higher
than the price proposed by the marketing director. Solaris will either
have to charge a higher price or look at ways to reduce costs.
It may be difficult to increase the price if customers are price sensitive
and are not prepared to pay more. Costs could be reduced by analysing
each part of the costs throughout the life cycle and actively seeking cost
savings. For example, using different materials, using cheaper staff or
acquiring more efficient technology

16. DESIGN COSTS OUT OF PRODUCTS
MAXIMIZE THE RETURN OVER PRODUCT LIFE CYCLE
Between 70% to 90% of a product’s life cycle costs are determined by decisions made
early in the life cycle, at the design or development stage.
80% - committed cost planning and design stage.
In contrast, majority of costs are incurred at the manufacturing stage.

17. MAXIMIZE THE LENGTH OF THE LIFESPAN
Product life cycles are not predetermined; they are set by the actions
of management and competitors. Once developed, some products lend
themselves to a number of different uses
By entering different national or regional markets one after another an
organisation may be able to maximise revenue.

18. Organization liquid.
Sooner the R&D Costs repaid, there will be funds to develop a product.
MINIMIZE THE BREAKEVEN TIME
MINIMIZE THE TIME TO MARKET
If an organization is launching a new product it is vital to get it to the
market place as soon as possible.
The life span may not proportionally lengthen if the product’s launch is
delayed and so sales may be permanently lost.

19. Time based analysis
Overall Cost Analysis
Pre-production analysis
Effective price decisions
Better decision making
Long run wholistic view
Lifecycle budgeting
Review
IMPORTANCE OF PRODUCT LIFECYCLE COSTING

20. QUIZ TIME

21. a) Introduction
b) Growth
c) Maturity
d) Decline
01. In which stage prices fall close to the cost, due to
the effect of competition.

22. ANS; C) Maturity

23. a) Statement 2 only
b) Neither statement
c) Statement 1 only
d) Both statements
02. Which of the following statements is/are true?
1. Lifecycle costing aims to ensure that a profit is generated over the
entire life of a product
2. Lifecycle costing takes into account all costs over the life of a
product, with the exception of costs already spent on the design and
development

24. ANS; C) Statement 1 only

25. a) Rs. 7.5 per unit
b) Rs. 8.5 per unit
c) Rs. 8 per unit
d) Rs. 7 per unit
03. A company is developing a new product and expects to sell
4,000 units per year over a period of 5 years.
The lifetime costs of the product are:
1. Design and development Rs. 50,000
2. Manufacturing Rs. 5 per unit
3. End of life costs Rs. 10,000

26. ANS; C) Rs. 8 per unit

27. 04. Company XYZ is evaluating the costs associated with a new
product from its inception to its disposal. Which of the following
stages of the product life cycle is most likely to have a
significant impact on the product's cost structure?
a) Introduction
b) Growth
c) Maturity
d) Decline

28. ANS; C) Maturity

29. 05. What strategy might a company use during the growth
stage to capture a larger market share?
a) Price reduction
b) Cost-cutting
c) Decreased promotion
d) Limited distribution

30. ANS; a) Price reduction

31. THANK YOU