CIMA P2 Syllabus A. Managing The Costs Of Creating Value - Benefits of Life Cycle Costing - Notes ^{7 / 7}

The benefits of product life cycle costing are summarised as follows:

1. All costs (production and non production) will be traced to individual products over their complete life cycles and hence individual product profitability can be more accurately measured.

2. The product life cycle costing results in earlier actions to generate revenue or to lower costs than otherwise might be considered.

3. Better decisions should follow from a more accurate and realistic assessment of revenues and costs, at least within a particular life cycle stage.

4. Product life cycle thinking can promote long-term rewarding in contrast to short-term profitability rewarding.

5. It helps management to understand the cost consequences of developing and making a product and to identify areas in which cost reduction efforts are likely to be most effective.  Very often, 90% of the product’s life-cycle costs are determined by decisions made in the development stage. Therefore, it is important to focus on these costs before the product enters the market.

6. Identifying the costs incurred during the different stages of a product’s life cycle provides an insight into understanding and managing the total costs incurred throughout its life cycle. Non production costs will become more visible and the potential for their control is increased.

7. More accurate feedback on the success or failure of new products will be available.

To maximise a product’s return over its lifecycle, a number of factors need to be considered:

• Design costs: - since approximately 90% of a product’s costs are often incurred at the design and development stages of its life, it is absolutely important that design teams work as part of a cross-functional team to minimize costs over the whole life cycle.

• Minimise the time to market: - since competition is harsh, it is vital to get any new product into the marketplace as quickly as possible. and make a profit before competition increases.

• Maximise the length of the life cycle itself: - Generally, the longer the life cycle, the greater the profit that will be generated.  How can the life cycle be maximised?

  a. Get the product to the market as quickly as possible
  b. Find other uses or markets for the product
  c. Market skimming (introducing the product at a high price) will prolong life and maximise the revenue over the product’s life.

• Minimise break-even time: - The quicker costs are covered, the more funds the company will have to develop further products.