Bernardus Alan Handoko

11/311392/EK/18212
IUP Accounting 2011

CHAPTER 8
MEASURING AND MANAGING LIFECYCLE COSTS
Summary:

Total-Life-Cycle Costing
Total-life-cycle costing (TLCC) is the approach companies use to understand
and manage all costs incurred in:
o Research, development and engineering cycle
o Manufacturing cycle
o Post-sale service and disposal cycle
Also known as managing costs from the cradle to the grave.
Each part of a companys value chain (new product development, production,
distribution, marketing, sales, post-sale service and disposal) is typically
managed by a different organizational function. Companies need a total-lifecycle perspective that integrates the tradeoffs and performance over time
and across functional units.
o Research, Development, and Engineering Stage
The RD&E Stage has three substages:
Market research
Product design
Product development
By some estimates, 80% to 85% of a products total life costs are
committed by decisions made in the RD&E stage of a products life
o Manufacturing Stage
This stage offers little opportunity for engineering decisions to reduce
costs since most costs have already been determined during the RD&E
stage
o Post-Sale Service and Disposal Stage
The service stage begins once the first unit of a product is in the hands
of the customer
Disposal occurs at the end of a products life and lasts until the
customer retires the final unit of a product
Service Stage
Disposal Stage

Target Costing
An approach that considers manufacturing costs early in the design
decisions. Helps engineers design new products that meet customers
expectations and that can be manufactured at a desired cost. An important
management accounting method for cost reduction during the design stage
that helps manage total-life-cycle costs
Target Costing Method:
Although the initial steps appear similar to traditional costing, there are some
notable differences:

Bernardus Alan Handoko

11/311392/EK/18212
IUP Accounting 2011

1. Marketing research is customer-driven.

2. Project engineers attempt to design costs out of the product before design
and development end and manufacturing begins.
3. The total-life-cycle concept is used by making it a key goal to minimize the
cost of ownership of a product over its useful life.
4. Engineers set an allowable cost that enables the targeted product profit
margin to be achieved at a price customers are willing to pay.
5. The target profit margin results from a long-run profit analysis, often
based on return on sales.
6. The target cost is the difference between the target selling price and the
target profit margin.
7. Once the total target cost has been set, the company must determine
target costs for each component.
8. The value engineering process includes examination of each component
of a product to determine whether it is possible to reduce costs while
maintaining functionality and performance.
9. Several iterations of value engineering are usually needed before the final
target cost is achieved.
Cost Analysis
Cost analysis requires five sub-activities:
1. Develop a list of product components and functions
2. Perform a functional cost breakdown
3. Determine the relative importance of customers requirements
4. Relate features to functions
5. Develop relative functional rankings
Concerns About Target Costing
1. Lack of understanding of the target costing concept
2. Poor implementation of the teamwork concept
3. Employee burnout
4. Overly long development time
Break-Even Time
BET measures the length of time from the projects beginning until the
product has been introduced and generates enough profit to pay back the
investment originally made in its development.
BET brings together in a single measurement three critical elements in an
effective and efficient product development process:
1. BET requires tracking the entire cost of the design and
development process so that the company can recover its total
investment.
2. BET stresses profitability and encourages cross functional
teamwork to meet the customer needs.
3. BET is denominated in time and encourages the launch of new
products faster than the competition so that higher sales can be
earned sooner to repay the product development investment.

Bernardus Alan Handoko

11/311392/EK/18212
IUP Accounting 2011