Life Cycle Product Cost Accounting

Life cycle costing is very different than other types of product cost accounting, like process costing or job costing. These methods of product cost accounting only consider the initial cost of producing the item. In contrast, life cycle costing evaluates many factors of a product's entire life when assigning a cost to the individual item at the point of production. This includes costs that are incurred before production, in the research and development phase, and any additional costs expected to be incurred throughout the item's useful life. For technology-based products, life cycle cost accounting makes far more sense than any of the alternative methods. In these industries, a significant portion of a product's cost will be incurred during the initial design phase, not necessarily in the physical manufacture of the product units. While not acceptable as a reporting standard under Generally Accepted Accounting Principles (GAAP), life cycle product costing can be quite useful for internal management of the company.

Life cycle product costing: More accurate than other methods

Life cycle costing also gives a more accurate picture of the true profitability of a certain product. A company could be losing money over the entire life of a product, but not realize it because the manufacturing costs are low. Products that require maintenance, repair, or high levels of customer service in the years after sale are good candidates for life-cycle cost accounting. All of these activities can be a significant drain on the company in the future because of the amount of man-hours and warranty expense involved. Two other post-sale concerns that often get left out of traditional product cost accounting systems are distribution and marketing costs. Once the product is manufactured, it still must be physically distributed to the marketplace. With today's high fuel costs, the distribution chain of a product can make or break its profitability.

Life cycle product costing: How to use the information

Managers are able to use reports generated by life cycle cost accounting to make tangible improvements to their company's processes. Instead of being limited to only the manufacturing phase of a product's life, management can evaluate the efficiency of many other departments in the company, including quality control, repair, and customer service. For example, finding a technical flaw in the product that is leading to early failure may have been overlooked in a job cost system unless the manager thought to examine the repair department's costs. Under a life cycle product costing system, this drain on resources would be reflected in each individual item's estimated cost.