Math Solution (Life Cycle Costing)

Life Cycle Costing
Questions & Solutions

Cost Management, 5th Edition by Blocher
Blocher, Page-569, Self-Study Problem
Solution:
Life Cycle Costing
Blocher, Page-569, Q:13-3
Do pricing strategies change over the different phases of the sales life cycle? Explain how.
Solution:
The strategic pricing approach changes over the sales life cycle of the product.
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.
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. 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 a price setter.
Do cost management practices change over the product’s sales life cycle? Explain how.
Solution:
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. Master budgets (Chapter 10) are also used in these early phases to manage cash
flows; there are large developmental costs at a time when sales revenues are still relatively small. Then, as the strategy
shifts to cost leadership in the latter phases, the goal of the cost management system is to provide the detailed budgets
and activity-based costing tools for accurate cost information.
What is life-cycle costing? Why is it used?
Solution:
Life-cycle costing considers the entire cost life cycle of the product, and thus provides a more complete perspective of
product costs and product profitability.
It is used to manage the total costs of the product across its entire life cycle. For example, design and development costs
may be increased in order to decrease manufacturing costs and service costs later in the life cycle.
How important is product design in life cycle costing? Why?
Solution:
Product design is important in life cycle costing because the design of the product locks in most of the downstream
costs – manufacturing, distribution and service. A well-designed product will be easy and inexpensive to manufacture,
will have few quality defects which make it easy to sell and service, thereby reducing downstream costs. A common
rule of thumb is that design locks in approximately 80% of total life cycle costs.
For what types of firms is life-cycle costing most appropriate and why?
Solution:
Life-cycle costing is most appropriate for firms that have high upstream costs (i.e. design and development) and/or high
downstream costs (i.e. distribution and service costs). Firms with high upstream and downstream costs need to manage
the entire life cycle of costs, including the upstream and downstream costs as well as manufacturing costs. Traditional
cost management methods tend to focus on manufacturing costs only, and for these firms, this approach would ignore a
significant portion of the total costs.
Explain the difference in intended application between strategic pricing and life-cycle costing.
Life Cycle Costing
Solution:
Strategic pricing is used to help a firm develop and implement its strategy for success as its products and services
mature in the market place. The focus for new products is typically differentiation and there is a heavy focus on
research and development, while cost control becomes more important as the product matures. In contrast, life-cycle
costing is used to manage the costs of the product over its entire cost life-cycle - from research and development and
product testing to manufacturing and finally distribution and customer service.
At what phase in the product sales life cycle will prices likely be the highest: introduction, growth, maturity, or decline?
Solution:
The introduction phase.
Solution:
Life cycle costing can be used in the cost management of the IT department (or other service departments) over the life
cycle of the department’s assets. This is also called the management of the “total cost of ownership” of the assets. The
idea here is that the total cost of the IT department is represented by many different elements, including assets,
personnel, management, and other costs.
As the strategic goals of the organization change, the focus on different phases of the IT life cycle can change. For
example, when the organization experiences significant growth, the acquisition of new assets in phases one and two is
accelerated. At other times, the need for increased focus on user support is important, as the firm faces challenges in
introducing new organizational plans or management structures. The overall goal of taking a life cycle view of IT is to
realize that the total cost of the service department is made up of significantly different components, assets, personnel
and management, which relate to the different phases of the life cycle. At times, the focus will change from one phase
to another. Also, the life cycle view provides an important new forward-looking view – how will the costs of IT change
in the future as the organization grows or changes strategic direction? What will be the effect of an unexpected loss of
data or processing capability, and how can these unexpected events be prevented to reduce the overall cost of IT?
Life Cycle Costing
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Life Cycle Costing
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Life Cycle Costing
Cost Accounting, 6th Edition by Horngren

Horngren, Page-549, Q:13-13
What is life-cycle budgeting?
Solution:
Life-cycle budgeting is an estimate of the revenues and costs attributable to each product from its initial R&D to its
final customer servicing and support.
What are three benefits of using a product life-cycle reporting format?
Solution:
Three benefits of using a product life-cycle reporting format are the following:
1) The full set of revenues and costs associated with each product becomes more visible.
2) Differences among products in the percentage of total costs committed at early stages in the life cycle are
highlighted.
3) Interrelationships among business function cost categories are highlighted.
Solution:
Life Cycle Costing
Life Cycle Costing
P2 (CIMA), Advanced Management Accounting
P2 (CIMA), Page-31, Exercise-1
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Life Cycle Costing
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Performance Management (ACCA,F5)

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Life Cycle Costing

Questions & Solutions

Blocher, Page-574, Q:13-40

Cost Accounting, 6th Edition by Horngren

P2 (CIMA), Page-32, Exercise-2

P2 (CIMA), Page-33, Exercise-3

Performance Management (ACCA,F5)

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