Learning Outcomes
After reading this article, you will be able to explain the purpose and methodology of life-cycle costing in strategic cost management. You will identify costs at each stage of a product’s life cycle, prepare a life-cycle cost calculation, understand the concept of cost profiles, and discuss the benefits and challenges of life-cycle costing, as required for the ACCA Performance Management (PM) exam.
ACCA Performance Management (PM) Syllabus
For ACCA Performance Management (PM), you are required to understand how life-cycle costing supports strategic cost management. This includes recognising and analysing cost behaviour over a product’s life, and applying this knowledge to performance evaluation and strategic decision-making. Specifically, you should focus your revision on:
- Identifying costs incurred at different stages of a product’s life-cycle
- Preparing a life-cycle cost or profit statement in manufacturing and service industries
- Describing the benefits and practical limitations of life-cycle costing
- Explaining how cost profiles inform product strategy and pricing decisions
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.
- What is the main difference between traditional cost analysis and life-cycle costing?
- Which stages of a product’s life-cycle typically incur the highest proportion of total costs?
- When conducting life-cycle costing, are all costs and revenues, including those before launch and after withdrawal, included in the calculation?
- Give two benefits of using life-cycle costing for strategic decision making.
Introduction
Effective cost management requires visibility over all costs that a product or service incurs, from initial design to withdrawal. Traditional approaches often focus only on annual or period costs, which can misrepresent true profitability and lead to poor decision-making. Life-cycle costing addresses this by tracking all costs and revenues over a product’s entire life. This approach provides clearer understanding for design, pricing, and discontinuation decisions.
Key Term: life-cycle costing
A cost management technique that accumulates and analyses all costs and revenues attributable to a product, service, or project over its entire life span.Key Term: cost profile
A graphical or tabular representation showing how costs are distributed across different stages of a product or project life-cycle.
Cost Profiles and the Product Life-Cycle
A product does not incur costs uniformly over its life. Costs typically follow a pattern, or "cost profile," which is shaped by the stages the product passes through:
- Development (design, research)
- Introduction (launch, promotion)
- Growth (increasing output, scaling)
- Maturity (stable operations, marketing)
- Decline (withdrawal, disposal, support)
Most costs are committed early—often before a product is even released. For example, decisions in the design stage can determine the majority of production and support costs.
Worked Example 1.1
A software company incurs the following costs for its new product:
- Research & design: $250,000
- Production setup: $50,000
- Marketing launch: $80,000
- Variable production cost: $10/unit for 12,000 units
- Customer support: $30,000 over the product’s life
- Withdrawal/closure: $20,000
Calculate the total life-cycle cost and the average cost per unit.
Answer:
Total life-cycle cost = $250,000 (R&D) + $50,000 (setup) + $80,000 (marketing) + ($10 × 12,000 = $120,000) + $30,000 (support) + $20,000 (withdrawal) = $550,000
Average cost per unit = $550,000 ÷ 12,000 units = $45.83
Benefits of Life-Cycle Costing
Life-cycle costing helps management by:
- Highlighting costs incurred before launch and after maturity, often missed in annual cost statements
- Ensuring pricing and profitability analyses cover all relevant costs, improving accuracy of strategic decisions
- Enabling cost reduction at the design and planning stage, when most costs are "locked in"
- Supporting comparisons between products or projects with different durations or volume patterns
Worked Example 1.2
A company is planning to launch a product with heavy marketing expenses in the introduction phase, expecting unit production costs to fall as volumes rise (due to learning curve effects). If management only considers the first-year costs, what is the risk?
Answer:
The risk is that the product will appear unprofitable in its first year, discouraging further investment. However, life-cycle costing would show that later years’ higher volumes and lower costs could make the product profitable overall.
Limitations and Practical Challenges
Despite its advantages, life-cycle costing has practical challenges:
- Estimating future costs and revenues (especially in maturing or declining stages) can be difficult
- Cost profiles may be unpredictable for innovative or fast-changing products
- Not all organisations have systems in place to track non-production (e.g., design, support) costs accurately
Exam Warning Do not calculate annual product or service profitability using only current period costs. This ignores significant costs from earlier (development) or later stages (withdrawal/support), leading to incorrect strategic decisions. Always consider the full life-cycle where possible.
Cost Profile Example Across the Life-Cycle
| Stage | Typical Costs | Notes |
|---|---|---|
| Development | R&D, design, feasibility | High, mostly "committed" |
| Introduction | Launch marketing, initial setup | High, non-recurring |
| Growth | Variable production, scaling | Per-unit costs may decrease |
| Maturity | Production, maintenance, marketing | Lowest per-unit costs |
| Decline | Withdrawal, disposal, support | Can be significant |
Using Cost Profiles for Decision Making
Reviewing cost profiles enables better management of pricing, investment, and product withdrawal decisions. Management can identify:
- Where costs are committed and control is possible
- Whether a product is viable over its full life, not just in a single period
- Where to target cost reductions (e.g., design stage)
- When to plan for end-of-life costs such as disposal or decommissioning
Worked Example 1.3
A manufacturer spends $1m to design a new medical device, expecting to produce and sell 200,000 units at $30 each. The design cost represents 50% of the total anticipated cost. Should management accept a low profit margin in the introduction period?
Answer:
Yes, accepting low margins early can be justified if total life-cycle profits are sufficient. Early design and introduction costs are high but will be spread over high volume in later life-cycle stages, reducing average cost per unit. Life-cycle costing reveals the true profitability.
Summary
Life-cycle costing provides a complete view on all costs and revenues of a product or service. By focusing on the whole life—the cost profile—it supports informed pricing, investment, and withdrawal decisions. For ACCA PM candidates, remembering that most costs are committed before production and that profitability must be assessed over the entire life-span is essential.
Key Point Checklist
This article has covered the following key knowledge points:
- Recognise the stages of a product life-cycle and corresponding cost drivers
- Define and prepare a life-cycle cost statement
- Explain the value of cost profiles for strategic decision making
- Identify benefits and limitations of life-cycle costing over annual cost analysis
- Apply life-cycle costing in both manufacturing and service contexts
Key Terms and Concepts
- life-cycle costing
- cost profile