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(a) Life cycle costs
The costs incurred on products and services from their design stage, through development to market launch, production and sales, and their eventual withdrawal from the market are known as life cycle costs.
Traditional approach to determining product probability
Life cycle costing is an alternative to the traditional approach to determining product profitability where costs are reported at the physical production stage of the life cycle of a product; costs are not accumulated over the entire life cycle. Such a practice does not therefore assess a product's profitability over its entire life but rather on a periodic basis. Costs tend to be accumulated according to function; research, design, development and customer service costs incurred on all products during a period are totalled and recorded as a period expense.
The life cycle approach
In life cycle costing all costs including R&D are attributed to a product and these costs are traced to individual products over complete life cycles. Actual plus projected costs and revenues and original (or revised) budgeted life cycle costs and revenues for a product are then compared (replacing the traditional comparisons between budgeted and actual costs on a month by month basis).
Life cycle costing and Lumsden
Within the AMT environment being considered by Lumsden, the duration of product life cycles will decrease as the pace of technological change increases and consumer demand becomes more sophisticated. Increasing automation will mean that up to 90% of product life cycle costs will be determined 'up front' by decisions made early within the product's life cycle. The introduction of life cycle costing by Lumsden would ensure that the tightest cost controls were at the design stage of potential new products, the point at which the majority of costs are committed. Initial product proposals would be far more carefully costed, which would be particularly important as Lumsden has little experience of working in the new environment. The system would assist in the planning and control of their products' life cycle costs and would monitor spending and commitments to spend during the early stages of the products' life cycles.
Life cycle costing increases the visibility of costs such as those associated with research, design, development and customer service, and also enables individual product profitability to be more fully understood by attributing all costs to products. This will provide Lumsden with more accurate feedback information on its success or failure in developing its new products. This will be vital in
Lumsden's intended operating environment, in which the ability to produce new and updated versions of its products will be of vital importance to its survival.
If Lumsden achieve the proposed degree of flexibility, however, and if product life cycles become too short, it may not be realistic to install a cost tracking system which produces reports too late for remedial action to be effective. Too much time may be spent on producing product budgets than merited by the potential benefits. If this is the case, Lumsden would be advised to rely on a range of non-financial indicators to help with the monitoring and control of costs.