There are a number of benefits associated with life cycle costing.
(a) The life cycle concept results in earlier actions to generate revenue or to lower costs than otherwise might be considered. (b) Better decisions should follow from a more accurate and realistic assessment of revenues and costs, at least within a particular life cycle stage. (c) Life cycle thinking can promote long-term rewarding in contrast to short-term profitability rewarding. (d) The life cycle concept helps managers to understand acquisition costs vs. operating and support costs. It encourages businesses to find a correct balance between investment costs and operating expenses.
With life cycle costing, non-production costs are traced to individual products over complete life cycles. (a) The total of these costs for each individual product can therefore be reported and compared with revenues generated in the future. (b) The visibility of such costs is increased.
(c) Individual product profitability can be better understood by attributing all costs to products. (d) As a consequence, more accurate feedback information is available on the organisation's success or failure in developing new products. In today's competitive environment, where the ability to produce new or updated versions of products is paramount to the survival of an organisation, this information is vital.
In order to compete effectively in today's competitive market, organisations need to redesign continually their products with the result that product life cycles have become much shorter. The planning, design and development stages of a product's cycle are therefore critical to an organisation's cost management process. Cost reduction at this stage of a product's life cycle, rather than during the production process, is one of the most important ways of reducing product cost.
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