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| Corporate practice bd |
Life Cycle Costing:
Life cycle costing is employed to develop and manufacture goods that will have the smallest amount of cost to the customer to put in, operate, maintain, and lose. within the customer service and field service areas, life cycle costing is concentrated on minimizing the quantity of warranty, replacement, and field service work that has got to be performed on products over their useful lives.
Life cycle costing process:
There are three major components of lifecycle costing is under below
01. Up strem cost:
Under this cost include-R & D cost,Design,Prototyping,Testing,concurrent,Engineering,and Quality improvement.
02.Manufacturing cost:
Under this cost include- Purchase of direct materials,Indirect manufacturing cost.
03. Down strem cost:
Under this cost include- Marketing & distribution cost , Device & Warranty cost.
Purpose of life cycle analysis
01.Cost identification:
The purpose of life cycle analysis is to spot all kinds of costs that a business might not think about within the initial stages. Life cycle analysis throws light on whether profits can recover the prices incurred at different stages of a product’s life cycle. instead of comparing individual costs, a cumulative comparison of the choices is feasible by first identifying all the prices associated with the asset or product.
02. Costs comparison:
Another major purpose of Life cycle costing is cost comparison to create effective decisions that may prove fruitful within the long run. Businesses can like better to invest as they need reckoning on what proportion they're willing to spend. after they have various options, it is sensible to check the prices that may be incurred to create smarter decisions
03. Effective planning:
Life cycle costing aids in planning. A business can effectively plan when it's responsive to the assorted costs involved.
Let,s start with Practical Example - (CMA-August-2014)
Practical Example. (01) (Try yourself)
The marketing department of wimax company LTD has a idea for new product that is expected to have a life cycle of 5 (five) years . after conducting market research ,the company has determined that the product could sell for tk.250 per unit in the first 3 years of life and tk.175 per unit for the last 2 years . Units are expected to sale as follows-
Year-1 =3000 units
Year-2 =4500 units
Year-3=4800 units
Year-4 =5000 units
Year-5=1500 units
per unit variable selling cost are estimated at tk.30 through the product life annual fixes selling and admin costs are expected to be tk.3,50,000.000. wimax desire a profit margin of 20% of selling price per unit.
Requirement:
01.Complete the life cycle target cost to manufacture the product
02.If the company expect the to cost tk.65 to manufacture in the first years whats is the maximum that manufacture cost can be in the following 4 years.
03.Assume the wimax co. manufacturing engineers include that the expected manufacturing cost per unit tk.70. What action might the company take to reduce this cost?