Business Definition for: Life-cycle Costing Life cycle costing is a method of calculating the total cost of a physical asset

throughout its life. Life-cycle costing is concerned with all costs of ownership and takes account of the costs incurred by an asset from its acquisition to its disposal, including design, installation, operating, and maintenance costs. Life-Cycle Costing Life-cycle costing offers a different way to look at overall product costs than other types of costing such as job-order, process, and activity-based costing. While many costing methods seem very similar, life-cycle costing stands out from the crowd. Life-cycle costing takes an entirely different view on product costing than other types of costing methods such as job-order and process costing. Finding the right product costing method is essential for a business to stay competitive in todays cost-conscious world. What Is Life-Cycle Costing? Life-cycle costing is a method of costing that looks at a products entire value chain from a cost perspective. Other types of costing generally look only at the production process, whereas life-cycle costing tracks and evaluates costing from the research and development phase of a products life, through to the decline and eventual conclusion of a products life. This approach to costing makes sense for several reasons. First of all, most of a products costs are committed before the product is in the production phase. This means that the majority of control management can exert over production and other costs is during the design phase of the products life-cycle. Life-cycle costing also looks at product costs post-sale. Examples of this type of cost are warranties, customer service, marketing, and distribution costs. Where most types of costing systems focus on cost control, life-cycle costing focuses on reducing costs throughout a products life. Life-Cycle Costing and Value Engineering Life-cycle costing is also heavily associated with value engineering. Value engineering is a process used by businesses to reach target cost goals. This process touches all aspects of a product. It is designed to eliminate activities that do not add value, and increase efficiency in activities that are necessary and do add value. Life-Cycle Costing Procedures In its standard form, life-cycle costing cannot be used for financial reporting and in and of itself is not consistent with generally accepted accounting principles (GAAP). However, lifecycle costing is perhaps the best form of costing from a planning standpoint, and is a great tool that can be used by product managers throughout the life-cycle of a product.

In order to use life-cycle costing to its fullest, costs must be calculated from the point of the initial idea for the product, until the product is no longer made. These costs are then divided by the total number of expected units to be sold throughout the lifetime of the product to come to a total cost per unit. This process can help product managers to get a realistic view of the total cost of a product, so they can design and adjust accordingly. When Is Life-Cycle Costing Appropriate? Life-cycle costing is most appropriate when a product is in the design, or pre-design stages. This will allow management to gain the most benefit from the process, as opposed to attempting to use life-cycle costing after a product is already in the marketplace.

---------------------------------------------------------------------------------------------------------------Target Costing: An important form of market-based price is the target price. A target price is the estimated price for a product (or service) that potential customer will be willing to pay. This estimate is based on an understanding of customers perceived value for a product and competitors response. A target operating income per unit is the operating income that a company wants to earn on each unit of a product (or service) sold. Features: (a) Target costing is an important component in a new products design and introduction.
(b) It constitutes a part of the profit management process and helps in the establishment

of a target profit margin. Competitor Accounting/ Analysis: Competitor accounting is the process of recording, classifying competitor analysis information and interpreting results. Competitor analysis is a part of the strategic planning process and helps the management understand their competitors action and their own competitive advantages/ disadvantages. Competitor analysis helps in knowing the strengths and weakness of competing products or services. It helps to know the matters that have to be focussed upon in order to be competitive. The company could also list features which could be included to make their product on par with the competitor. Competitive Bidding: Competitive bidding is a procedure whereby an underwriter submits a sealed bid to the issues who then awards the contract to the bidder who has the best price and contract terms. Competitive bidding puts a lot of responsibility on the manager regarding the bidding price.

Bid price is directly proportional to the profit on job. If a firm gets a contract it will have more profit on the job as it was selected due to a higher bid price, there is also a chance that the firm would lose the contract due to its high price. Value engineering/ Value analysis: Value engineering is also referred to as value analysis. It is a cost reduction technique used in target costing for product costs involving assessment of each component of a product to find out if the cost can be reduced while maintaining the functionality of the product. It helps in improvement of the process and product design which is done through a consumer analysis. Consumer preferences are known and so requirements are met as per these demands. Benchmarking: Benchmarking also called as competitive benchmarking helps to search for the best practices followed in other companies. It involves analysing, studying these practices and conforming them to companys own performance so, that its incorporation into the activities would result in improved efficiency and cost effectiveness. Benchmarking may be internal or external. Internal Benchmarking: It is a benchmarking which is done within an organisation for similar activities or operation but performed by different units. External Benchmarking: It is a benchmarking which is done outside an organisation. For similar activities or operations performed in another different company. Benchmarking Process: The steps in benchmarking process are as follows: Step 1: Company does an internal study to identify area areas to benchmark for study and then does a preliminary competitive analysis. Step 2: Develop a benchmarking team. Step 3: Identification of partners ready for benchmarking. Step 4: Decision on gathering and sharing of information and procedure to collect it. Step 5: Put into action information results of benchmarking.