Life cycle costing in performance Management
Sunday ,19 July 2015
Church time!`. Felt exhausted, I did night yesterday, trying to finish up that target costing. I was determined to go to church though. I quickly got up, had my bath, wore my clothes and headed on to church with my mum and sister. Then when I got there, I was pissed off. Imagine one guy coming out of nowhere to stop me that my haircut was not allowed, like this was a primary school or something where haircut styles are dictated every week.
Arrant nonsense,I was too pissed off to listen to the what he was saying.
When I came, I then checked the notice board for their do’s and dont’s. They marked a punk style with x and a low cut all through with the correct tick. For pit sake, I am on a high top fade. What is so bad about that?. Bloody hypocrites, these are the kind of people that discourage others to come and serve the lord in these days when everyone seems to be far from him or unwilling to take a glance at him. But I would not be discouraged and would not let some hypocrite spoil my relationship with him. I am still going to be on my hairstyle because firstly, a low cut doesn’t fit me and secondly, that high-top fade is my swag yo…lol..
The irony of life is that those ones who are doing like they are the holier than thou might have be very corrupt on the inside oo, whereas those they are faulting might be holier. And Jesus warned them in matthew 7:5 when he said “You hypocrite, first take the plank out of your own eye, and then you will see clearly to remove the speck from your brother’s eye”. That aside, after church, I got down and hit the books and read something on life cycle costing.
LIFE CYCLE COSTING
Life cycle costing is an approach that accumulates costs over a products entire life, rather than calculating them for each accounting period through the product life. It is a costing technique used primarily for planning lifetime costs and profitability.
Product life cycle
A product life cycle can be divided into five phases which are : a) Development b) Introduction c) Growth d)Maturity e)Decline
a) Development: A product starts with the development stage, in this stage research and design is carried out on the product. It incurs some costs even though it is not yet on the market and is making no revenue.
b) Introduction: The product is introduced to the market in this stage. Potential customers become initially aware of the products and costs such as advertising and capital expenditure costs may be incurred to make the product popular and mass produce it.
c) Growth: There is a rising awareness of the product, and the product grows in demand and gains a bigger market share
d) Maturity: The growth in demand for the product will slow down and it will enter a period of relative maturity, when sales have reached a peak and are fairly stable. This is usually the most profitable stage of the product. Thee product may be modified or improved upon to sustain its competitiveness in the market and attract more demand for it.
e) Decline: This is where the market reaches a saturation point and might have just have had enough of the product. Demand will start to fall, and eventually it will become a loss maker and this is when the organization should stop selling the product or rendering the service.
The component elements of a product’s cost over its life cycle may include the following:
a) Research and development costs: Under this, costs that may be incurred include the design cost, cost of making a prototype, testing cost, production process and equipment development and investment.
b) Training costs for members of staff and operators
c) Production costs: This is for when the product is eventually launched into the market.
d) Distribution cost
e) Marketing and advertising costs
f) Inventory costs
g) Retirement and disposal costs.
Benefits of life cycle costing
- It helps management make decisions on whether to develop a product commercially, or to continue making the product by assessing the profitability of each product over the full life.
- Better decisions can be made with a more accurate and realistic assessment of revenues and costs like the life cycle costing gives.
- It encourages longer term thinking and forward planning.
In life cycle costing, a short BET (Break even time) is very important in keeping an organization liquid. The sooner the product is launched the quicker the R&D costs will be repaid, thus providing opportunities to invest in new products. Break even occurs when revenue from the product has covered all the costs incurred to date, including design and development costs.
Customer life cycles
Customers also have life cycles, and it should be the aim of the organization to extend it as long as possible some of the ways of doing this is to encourage customer loyalty by issuing loyalty cards or offering discounts to customers who return to the shop and spend a certain amount with the organization.
Existing customers tend to be more profitable than new ones and should be retained wherever possible.
Recommended Reading
B. Dhilon., Life Cycle Costing: Techniques, Models and Applications
