Alternative Costing Part3

ACCA F2 - Management Accounting

A modified synopsis for the article linked below:

Marketing says that there is no point in management, engineers and accountants sitting in darkened rooms dreaming up products, putting them into production, adding on, say 50% for mark-up then hoping those products sell. At best this is corporate arrogance; at worst it is corporate suicide.

Life cycle costing: Cost phases

Phase	Examples of types of cost
Design	Research, development, design, tooling
Manufacture	Material, labor, overhead
Operation	Distribution, advertising, warranty claims
End of life	Environmental clean-up, disposal, decommissioning (Environmental Accounting)

The table emphasizes on the full cost from research and development to decommissioning and environmental cleanup. This provides enough guidance in different functional areas to control overhead and reduce cost to meet target. Cost within a functional unit or different units may be linked to each other. E.g. quality assurance cost (increase) and warranty cost (decrease), or quality assurance cost (increase) and training/development (increase). Different categories of costs are incurred in different phases of product cycle.

Now let us see how cost and price fluctuates over life span of a product:

Industry and product features	Introduction	Growth	Maturity	Decline
Competition - cost and price	Few rivals - High cost - High price	Many new entrants -Cost starts decreasing - Price at peak	Shake-out - Cost at its lowest point - Price shrinks	Few survivors - cost is at its low point -Price war
Demand - market strategy	undefined - market skimming	defined to target - increase market penetration	target stabilizes - profit through cost reduction	Falling demand - because of new developments
Product features - production process	Inconsistent -production process attracts high cost	Improved - defined and improved process reduces overhead	Standardized - cost stabilizes at lower level	Standardized - cost stabilizes at lower level
Critical Success Factors	Innovative product	Products are able to be mass produced	Efficiency at operation to keep cost low	Brand loyalty

ACCA Article: Target costing and lifecycle costing