Costing 1: life cycle costing

Accounting Ahead | Original study resource | accountingahead.com.au

Costing 1: life cycle costing

MODULE 6 | PART D.2.1 | STUDENT COMPANION

Life cycle costing treats each product as an investment: across introduction, growth, maturity and decline it

must recover all costs - research, design, production, marketing, distribution, service and disposal - and earn a

return that justifies the risk. A balanced portfolio uses mature products' cash to fund new ones.

The cash curve

-$5m

-$4m

-$3m

-$2m

-$1m

$0m

$1m

$2m

$3m

$4m

$5m

$6m

$7m

$8m

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Standard development Faster development

Illustrative: faster development deepens the dip but brings positive cash forward

Costs committed versus costs incurred

0%

20%

40%

60%

80%

100%

Concept Design Prototype Set-up Production Support

Costs committed Costs incurred

Illustrative: most costs are locked in at design, long before they are spent

So what? Cutting costs during production has limited scope. The big opportunities lie before production (target

costing); during production, continuous improvement (kaizen costing) takes over.

STRATEGIC MANAGEMENT ACCOUNTING | M6 PART D.2.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Reverse flows at the end of life

Use

Product reaches the

end of its life

Recover

Returns, take-back

schemes, recalls

Re-use or

remanufacture

Refill, rebuild,

repurpose

Recycle

Recover the

materials

Dispose

Landfill or

incineration - the last

resort

Design upstream to make every reverse step cheaper - or profitable

Case note: since 1973 Caterpillar has run a remanufacturing business. Customers buying a remanufactured

part pay a core deposit, refunded when they return the old part (the core) in acceptable condition; Caterpillar

rebuilds the cores for resale. Environmental impacts run through every stage - energy for extraction,

manufacturing, transport, use and recycling, plus emissions and toxic by-products.

Sources: Caterpillar, 'The Cat Reman story' and core acceptance guidance.

Formulas and rules

Item Rule

Life cycle cost All costs from research and design to disposal, assessed per product

Cash curve Negative during development and launch; positive through growth and maturity;

falls in decline

Committed vs incurred Design decisions lock in most costs before they are paid

Reverse flows Returns, warranty, recalls, take-back; re-use, remanufacture, recycle, dispose

Design for end of life Recyclable and fewer materials; easy disassembly

Question 1 - Zephyr's battery decision

Zephyr can glue its battery pack into the scooter frame, or use a screwed, modular pack that costs $14 more per

scooter to build. List the life cycle costs the choice affects, and explain why the decision matters now rather than

later.

STRATEGIC MANAGEMENT ACCOUNTING | M6 PART D.2.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Worked answers

MODULE 6 | PART D.2.1 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Worked answer

The choice affects: assembly time and cost; warranty repairs (a modular pack can be swapped in minutes rather

than replacing the frame); spare parts and service revenue; customer satisfaction and resale value; product

take-back and recycling costs (easy separation of the battery, a hazardous component); and compliance with

any battery stewardship rules. The decision matters now because design commits these costs: once tooling is

built and production starts, changing the design is slow and expensive, even though most of the costs will be

paid years later. The extra $14 may well be repaid by lower warranty and end-of-life costs.

STRATEGIC MANAGEMENT ACCOUNTING | M6 PART D.2.1 | WORKED ANSWERS

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