## **Learning Outcomes**

After this article, you will be able to explain target costing and life cycle costing, including their application to sustainability issues and end-of-life costs. You will understand how organisations use these methods to meet customer needs, control costs, minimise environmental impacts, and ensure economic viability throughout a product’s life. You will also be able to evaluate the practical steps for integrating sustainability and end-of-life considerations into cost management and performance measurement.

## **ACCA Advanced Performance Management (APM) Syllabus**

For ACCA Advanced Performance Management (APM), you are required to understand how cost management techniques like target and life cycle costing support strategic objectives, sustainability, and performance appraisal. This article focuses your revision on the following:

- Define and apply target costing and life cycle costing as tools for cost management and product design.
- Explain the role of sustainability and end-of-life costs within cost control and decision-making.
- Evaluate how target and life cycle costing support sustainable product development and responsible disposal.
- Analyse the impact of cost management techniques on corporate environmental and social responsibility.

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. What is the primary difference between target costing and conventional cost-plus pricing?
2. Which costs are considered over the entire product life cycle in life cycle costing?
3. Name two sustainability-related costs that might be relevant at a product’s end-of-life stage.
4. True or false? Target costing forces companies to consider both customer requirements and environmental regulations at the design stage.
5. Briefly explain why life cycle costing is important for sustainability reporting.

## **Introduction**

Organisations face pressure to deliver products that are profitable, meet customer expectations, and comply with environmental and social standards. Target costing and life cycle costing provide structured approaches to cost control across the product’s life, with a growing emphasis on sustainability and managing costs related to end-of-life processes.

Traditional cost-plus pricing often ignores whether customers will pay the calculated price or whether products are sustainable throughout their life cycle. By contrast, target and life cycle costing require early consideration of market expectations, total cost, and future obligations such as recycling or disposal.

> **Key Term: target costing**
> A method of setting a cost for a product based on a competitive market price minus the required profit margin, guiding design and production decisions to ensure profitability.

## TARGET COSTING: CONTROLLING COSTS FROM DESIGN

Target costing begins with an analysis of what customers will pay for a product with specified features. From this market-based price, the company subtracts the profit margin to derive the target cost. The product must be designed and manufactured so it can be sold at or below this target cost.

Unlike cost-plus pricing, this approach ensures that only products meeting customer price expectations are brought to market while encouraging value analysis and cross-functional teamwork. Sustainability requirements—including materials, energy use, and end-of-life treatments—must be incorporated during the design stage to achieve the target cost.

> **Key Term: value analysis**
> A systematic review of a product’s components and processes to identify ways to reduce cost without compromising quality or essential features.

### Sustainability in Target Costing

Modern customers and regulators expect companies to address environmental and social effects of products. Target costing now typically includes sustainability objectives, such as using recycled materials, minimising energy consumption, or designing for easier disassembly at end-of-life. Failure to address these requirements can result in non-compliance, penalties, or market rejection.

### **Worked Example 1.1**

A company wants to launch an eco-friendly home appliance. Market research suggests an acceptable retail price of \$120. Management requires a profit of \$24 per unit. Early product designs estimate costs at \$105 per unit.

**Question:** What actions should the company take to achieve the target cost and ensure environmental objectives are met?

> **Answer:**  
> The target cost is \$96 (\$120 – \$24). The current estimated cost is too high. The company could review the design, source alternative recycled materials, simplify components for easier recycling, or streamline production processes. Each change must balance cost, product quality, and environmental performance to achieve both financial and sustainability targets.

## LIFE CYCLE COSTING: ASSESSING THE TOTAL COST

Life cycle costing extends cost analysis beyond manufacturing and sale. It considers all costs and revenues from initial product development to end-of-life, including disposal or recycling.

> **Key Term: life cycle costing**
> A cost management approach that tracks all costs and revenues attributable to a product, from conception through development, manufacture, use, and eventual disposal or recycling.

Life cycle costing is essential for products with long development, warranty, or disposal requirements. It identifies the true cost of ownership and highlights the impact of early decisions on future obligations and profitability.

> **Key Term: end-of-life costs**
> The costs incurred for a product's safe disposal, recycling, or decommissioning at the end of its useful life, often influenced by environmental and legal standards.
>
> **Key Term: sustainability**
> The practice of ensuring that economic, environmental, and social goals are balanced so that today’s needs are met without compromising the ability of future generations to meet theirs.

### Typical Life Cycle Cost Stages

1. Research and development
2. Design and engineering
3. Production and distribution
4. Customer use and support (including maintenance and warranties)
5. End-of-life (collection, recycling, disposal, decommissioning)

Tracking these costs encourages decisions that may increase initial design expenses but reduce overall cost and minimise environmental impact.

### Connecting Life Cycle Costing and Sustainability

Life cycle costing supports sustainability by making visible the costs of using hazardous materials, energy-intensive processing, or non-recyclable components. Companies can justify higher design investment if it leads to easier recycling or lower emissions at end-of-life. Responsible life cycle cost management can improve risk control, reputation, and compliance.

### **Worked Example 1.2**

A manufacturer introduces an electronics device with a 5-year average user life. Breakdown of main costs: development \$3m, production \$10 per unit, support \$3 per unit per year, recycling \$2 per unit.

**Question:** How does including recycling cost at the end of life affect design and pricing decisions?

> **Answer:**  
> Including the \$2 recycling cost prompts the company to consider design changes that facilitate recycling, such as fewer component types or avoiding hazardous substances. It may lead to preferring modular designs, even if initial costs rise slightly. Recognising end-of-life obligations in the price ensures customers share the full responsibility for the product, reducing environmental risk to the company.

### Managing End-of-Life Costs

End-of-life costs have become significant due to regulation, customer pressure, and sustainability goals. Companies are legally required in many markets to collect, recycle, or safely dispose of products. Failing to provide for these costs can result in large provisions and fines.

Life cycle costing ensures a company plans and budgets for these obligations, rather than treating them as unexpected expenses. In some cases, designing for circularity—where products can be refurbished or remanufactured—creates long-term value.

### **Revision Tip**

Include environmental and end-of-life obligations in all long-term product financial appraisals. Refer to relevant legislation and stakeholder interests in your exam answers.

## PERFORMANCE MEASUREMENT AND REPORTING

Cost management methods that omit sustainability and end-of-life factors may misrepresent product profitability. Effective performance measurement systems now include KPIs for recycled content, energy usage, emissions, and responsible disposal rates. Management accountants support sustainability reporting by ensuring life cycle and target costing data is accurate and used in relevant decision processes.

### **Exam Warning**

In exam scenarios, beware of proposals that ignore regulations or societal expectations regarding waste, recycling, or pollution. Examiners may expect you to recommend adjustments to costing or report preparation to address these areas.

## **Summary**

Target and life cycle costing equip organisations to develop products that meet market requirements, internal cost objectives, and external sustainability goals. Life cycle costing, in particular, ensures that all future costs—including environmental and social impacts—are considered in investment appraisal and product pricing. Addressing sustainability and end-of-life issues proactively supports compliance, reputation, and long-term success.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define and explain target costing and its link to market-driven price and value analysis
- Understand how sustainability objectives are incorporated during target costing
- Define and explain life cycle costing, including the consideration of end-of-life costs
- Identify types of costs across the product life cycle, including design, use, and disposal
- Evaluate the impact of including end-of-life and sustainability costs in cost management
- Recognise the importance of performance measurement and reporting for sustainability-related costs

## **Key Terms and Concepts**

- target costing
- value analysis
- life cycle costing
- end-of-life costs
- sustainability

Target and life cycle costing - Sustainability and end of life costs