Chapter 8

Cost Management For Product Life Cycle; Life-Cycle

Costing and Long-Term Pricing; Target Costing and
Theory of Constraints
Cost Management For Product Life Cycle:

Life Cycle Costing

This chapter focuses on the time dimension of cost
management. Consideration is given both to:
(1) The effect of the timeless of operations on the total cost,
and
(2) The way in which costs change over the life cycle of the
product.
Cost Management For Product Life Cycle:

Product Life Cycle is consideration in each

of two aspects:

a. The Cost Life Cycle

b. The Sales Life Cycle
Cost Management For Product Life Cycle:

Cost Life Cycle – is the sequence of activities

within the firm that begins with research and
development , followed by design,
manufacturing/distribution and customer
service.
Cost Management For Product Life Cycle:

Sales Life Cycle – is the sequence of phases in the

product’s and service’s life in the market – from
the introduction of the product or to growth in
sales and finally maturity, decline, and
withdrawal from the market.
Cost Management For Product Life Cycle:

Important Strategic Cost Management

Issues arise in each activity of the cost life cycle.
The methods helpful in analyzing the cost life-cycle
are:
a. Life-cycle costing
b. Target costing, and
c. Theory of Constraints
Cost Management For Product Life Cycle:

Life Cycle Costing

is used throughout the Cost Life cycle to minimize
overall cost.
Target Costing
is used for managing costs primarily in the design
activity
Theory of Constraints
is a method for managing manufacturing costs.
Cost Management For Product Life Cycle:

Two of the methods, Target Costing and Theory

of Constraints are particularly applicable to
manufacturing firms because they deal promarily
with product design and manufacture. However,
each method also can be applied to service firms, to
improve the efficiency and speed of the processes
involved in providing the service.
Cost Management For Product Life Cycle:

A. COST MANAGEMENT FOR THE PRODUCT LIFE-

CYCLE
Life Cycle Costing – is a management technique used to
identify and monitor the costs of product or service
throughout its LIFE CYCLE. It provides a long-term
perspective of product costs and product or service
profitability.
Cost Management For Product Life Cycle:

For instance: A product that is designed quickly and

carelessly, with little investment in design costs,
may have significantly higher marketing and
service costs later in the life cycle. Managers are
interested in the in the total costs, over the entire
life cycle, and not manufacturing costs only.
Cost Management For Product Life Cycle:

Total cost over the product’s life cycle often

is broken down into three components:
- Upstream costs
- Manufacturing costs
-Downstream costs
Cost Management For Product Life Cycle:
Cost Management For Product Life Cycle:

Upstream costs
Research
Design : Prototyping, Testing, Concurrent engineering and
quality development

Industries with high upstream costs include computer

software, specialized industrial and medical equipment.
Cost Management For Product Life Cycle:

Manufacturing costs
Purchasing
Direct Manufacturing Costs
Indirect Manufacturing Costs

Industries with high upstream costs include

computer software, specialized industrial and
medical equipment.
Cost Management For Product Life Cycle:

Downstream costs
Marketing and Distribution – packaging, shipping,
samples, promotion, advertising.
Service and Warranty – recalls, service, product
liability, customer support.
Industries with high downstream costs include
pharmaceutical, performer, cosmetics, and
toiletries.
Cost Management For Product Life Cycle:

Why design is important?

Decision making at the design stage is critical.
Although the costs incurred at the design
stage may be very small in relation to the
total costs over the entire life cycle.....????
Cost Management For Product Life Cycle:

The Critical success factors at the design stage

include
1. Reduced time-to-market
2. Reduced expected service costs
3. Imporved ease-of-manufacture
4. Process planning and design
Cost Management For Product Life Cycle:

Reduced Time-to-Market
The speed of product development and
the speed of delivery and efforts to reduce
time-to-market are critical for a business
firm to sustain its competitiveness.
Cost Management For Product Life Cycle:

Reduced Expected Service Costs

By careful simple design and the use of
interchangeable or modular components can
reduce expected service costs.
Improved ease-of-manufacture
The design must be easy to manufacture in order
to reduce production costs and speed production.
Cost Management For Product Life Cycle:

Process Planning and Design

The Plan for the manufacturing process
should be flexible, allowing for fast setups
and product changeovers, using computer-
integrated manufacturing computer assisted
design and concurrent engineering
Cost Management For Product Life Cycle:

Common Design Methods

(a) Basic Engineering
(b) Prototyping
(c) Templating
(d) Concurrent Engineering
Cost Management For Product Life Cycle:

Basic Engineering
This is a design method in which an
existing product is sealed up or down to
fit the specifications of the desired new
product.
Cost Management For Product Life Cycle:

Concurrent Engineering or
Simultaneous Engineering
is an important new approach in which a
product design is integrated with
manufacturing and marketing
throughout the product’s life cycle.
Cost Management For Product Life Cycle:
Cost Management For Product Life Cycle:

Cost Management Over the Sales Life Cycle

The Sales life cycle is the sequence of phases in the
product or services life in the market from the
introduction of the product or service to growth in
sales, and finally, maturity, decline, withdrawal from
the market. Sales are at first small, the peak in the
maturity phase and decline thereafter
Cost Management For Product Life Cycle:
Cost Management For Product Life Cycle:
Cost Management For Product Life Cycle:
Cost Management For Product Life Cycle:
Cost Management For Product Life Cycle:
Management Focus:

In the first Phase, the focus of management is

in design, differentiating and marketing. The
focus shifts to new product development and
pricing strategy as competition develops in the
Second Phase.
Cost Management For Product Life Cycle:
Management Focus
In the third and fourth phases, management’s
attention turns to cost control, quality and service
as the market continues to become more
competitive. Thus the firms strategy for the
product or service changes over the sales life
cycle, from differentiation in the early phases to
cost leadership in the final phases.
Cost Management For Product Life Cycle:

Strategic Pricing Strategy

In the first phase, pricing is set relatively high

to recover development costs and to take
advantage of product differentiation and the
new demand for the product
Cost Management For Product Life Cycle:

Strategic Pricing Strategy

In the second phase, pricing is likely to stay

relatively high as the firm attempts to build
profitability in the growing market. Alternatively, to
maintain or increase market share at this time,
relatively low prices (penetration pricing) might be
used.
Cost Management For Product Life Cycle:

Strategic Pricing Strategy

In the latter phases, pricing becomes more
competitive, and target costing and life-cycle
costing methods are used, as the firm becomes
more of a price taker rather than the price setter
and makes efforts to reduce upstream (for
product enhancement) and downstream costs.
Cost Management For Product Life Cycle:

Cost Management System

Together with the change in strategy and
pricing, there is a change in the management
system. At the introduction and into the growth
phases, the primary need is for value chain
analysis, to guide the design of products in a cost-
efficient manner.
Cost Management For Product Life Cycle:

Cost Management System

Master budgets also are used in these early

phases to manage cash flows; there are large
developmental costs at a time when sales
revenues are still relatively small.
Cost Management For Product Life Cycle:

Cost Management System

As the strategy shifts to cost leadership
in the latter phases, the goal of the
management system is to provide the
detailed budgets and activity based costing
tools for accurate information.