In management accounting, there are various costing methods applicable to use in practice. Some of practitioners are familiar with job order costing, process costing and activity based costing. The key idea is to apply the right costing method in the right situation. Life cycle costing (LCC) offers another choice to the user. It is usually found in manufacturing, construction, software companies and product development. As we know, consumer and manager need to make decision on the cost of acquisition and cost of ongoing use of many different assets like equipment, motor vehicle, plant and other. As it seems, the key factor to influence the decision of acquisition on assets is the initial capital cost. In addition, the unrealized cost such as ongoing operation and maintenance cost should be considered before the decision making is made. Life cycle Costing is a process to determine the sum of all the costs related with an asset throughout its life which include acquisition, installation, operations, maintenance, renovation and disposal costs. For example, if the managers want to buy the motor vehicle for the purpose of company. They are needed to consider the whole life cycle costing such as their maintenance, their operation, their initial acquisition, and other factor which can give more information to decision maker to make the better decision. This report sets out to address what LCC, why LCC, when LCC, how LCC use on the manufacturing industry. The aim is to provide a clear understanding toward life cycle costing in theory and practise.
1.) Life Cycle Costing
Life cycle costing is estimates and accumulated costs over a product’s entire life cycle in order to determine whether the profits earned during the manufacturing phase will cover the cost incurred during during the pre- (upstream) and post- (downstream) stage. By understand on how to identifying the cost incurred during the different stage of product life cycle, it might help the manager to manage the total costs incurred throughout its life cycle. In addition, life cycle costing is also helps managements deeply understanding the cost consequences of developing and making a product and to identify area in which may cost reduction effective.
1.1) Life Cycle Costing Concepts
The process of Live Cycle Costing involves:
I. Assessing costs arising from an asset over its life cycle. Asset life cycle consist of various phase which are planning, acquisition, managing, distribution, and disposition. Though the asset life cycle, all the cost arising from each phase must be estimated at the earlier stage to facilitate in the cost reduction. The acquirer should consider all relevant cost because it is not only about the initial investment and acquisition cost, but all cost occurred over the anticipated life cycle of the assets.
II. Evaluating alternative that have an effect on the cost of ownership. The comparisons of asset alternative whether it is at the concept or detailed design level should be evaluate in order to achieve better outcomes from the assets. Each alternative may have different pros and cons. Selecting unfriendly alternative may affect all the cost incurred during the period of ownership. Therefore, a thorough evaluation shall be made to avoid unwanted circumstances.
For example, the mobile phone industry such as Nokia, Samsung, HTC and other is a fast moving product. Life cycles are short, mobile phone manufacturers spent lots of money on R&D and they have to recover these costs in a short period of time. This explains why newly released mobile phones are sold at such high prices.
1.2) Reason for use Life Cycle Costing
I. Comparison of asset alternatives to achieve better outcome from asset. Each asset alternatives should be evaluated so that it will assess the risk and benefit on every alternatives. A strategize development and implementation of plans and programs for the assets should be...
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