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Artto, K. A. 1994. Life cycle cost concepts and methodologies. Journal of Cost Management (Fall): 28-32.

Summary by Mary Murphy
Master of Accountancy Program
University of South Florida, Summer 2001

Product Life Cycle Main Page | Investment Management Main Page

In this article Artto provides a discussion of life cycle costing concepts and methods and their use in target costing and controlling product costs. Final customer’s product life cycle cost and producer’s product life cycle costs are explained, as well as the analysis of these two concepts. Next, an "optimal solution" is discussed in relation to target costing. Finally, Artto discusses managerial and methodological aspects of life cycle analysis such as the optimal organizational model and analysis of the involved risks.

It is important to understand that life cycle cost deals with all costs, including costs the customer and producer incur after the product is purchased. In the life cycle perspective, both the quality of the product and the time related features are considered. One final introductory note, this article makes the following assumptions for simplicity’s sake:

Inflation is zero; all costs are discounted.

The producer sells the product directly to the final customer.

Final customer’s product life cycle cost (FC)

The FC is the total of the costs the customer incurs for the entire time he owns the product. It is this cost that a company must control relative to the available substitutes’ costs in order to be successful. Product design and planning should be based on the analysis of the market. Artto lists three dimensions that a customer considers in purchasing a product

Product quality,
Time related factors (availability, length of life), and
Purchase price.

Final customer’s product life cycle cost (FC) Analysis

The three above criteria must then be converted into quantitative targets. It is important to consider the circumstances; explanations should be well documented. Also involved in the FC is the costs incurred after the purchase:

Cost of late delivery,
Installation cost,
Operating cost,
Support cost,
Maintenance cost, and
Disposal cost/revenue.

The longer a product lasts, the more influence the quality and time related factors have on life cycle costs.

Quantifying quality and other factors

All costs affecting life cycle cost should be put into monetary terms. Often additional explanation is needed to support the quantification on certain factors. If FC analysis is used to compare products, it may be necessary to consider switching cost (in the case of substitute products) and the customer "revenues" (such as disposal revenue). Furthermore, FC may vary over the different marketing stages; therefore, FC may need to be analyzed for these different stages.

Producer’s Product Life Cycle Cost (PC)

The PC is the total of the producer’s costs for the entire period a customer has a product. Artto lists the following examples of factors involved in the PC:

Product conception,
Design,
Product development,
Production,
Logistics,
Marketing,
Service, and
Guarantees.

The FC analysis relates directly to the PC. For instance, the amount of guarantees made will affect the service/ maintenance costs. If these costs are billed to the customer, revenues will increase.

PC Analysis

The results of the PC analysis must be matched with the related FC analysis, which was used to determine price. PC is then subtracted from price to get assumed profit. Artto mentions that investment costs must also be assigned to PC, and that activity-based costing may be appropriate to allocate indirect costs.

Target Costing

The assumed profit, "optimal solution", is found by repeating the FC and PC analysis. This repetitious method should be repeated before any investment or manufacturing final decisions are made. Artto points out the importance of controlling costs during the development stage in order to reduce costs in the future.

Managerial and Methodological Aspects

Artto discusses the dysfunctionality of the traditional management accounting approach in relation to life cycle costing. He says that management should be organized into teams around the products. The product team should be in charge of the product for its full life. This should promote more effective and efficient decisions.

Analyzing Risks

In finishing, Artto discusses the prominent role of risks due to life cycle costing’s long-term approach. He says these can be kept at an acceptable level by remaining aware. Furthermore, these risks should be quantified and factored into the FC and PC analysis.

Summary of FC and PC Analysis:

Final Customer’s Product Life Cycle Cost Analysis

Generates the cost the customer will incur over the life of the product.

Starting point for product development.

Way to equalize three selection criteria.

Makes product characteristics more comparable in terms of price, quality and time-related factors.

Provides a framework for PC analysis.

Producer’s Product Life Cycle Cost Analysis

Generates the cost the producer will incur over the life of the product.

Based on the variables produced in the PC analysis.

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Related summaries:

Adamany, H. G. and F. A. J.Gonsalves. 1994. Life cycle management: An integrated approach to managing investments. Journal of Cost Management (Summer): 35-48. (Summary).

Clinton, B. D. and A. H. Graves. 1999. Product value analysis: Strategic analysis over the entire product life cycle. Journal of Cost Management (May/June): 22-29. (Summary).

Czyzewski, A. B. and R. P. Hull. 1991. Improving profitability with life cycle costing. Journal of Cost Management (Summer): 20-27. (Summary).

Hayes, R. H. and S. C. Wheelwright. 1979. Link manufacturing process and product life cycles. Harvard Business Review (January-February): 133-140. (Summary).

Hayes, R. H. and S. C. Wheelwright. 1979. The dynamics of process-product life cycles. Harvard Business Review (March-April): 127-136. (Summary).

Hertenstein, J. H. and M. B. Platt. 1998. Why product development teams need management accountants. Management Accounting (April): 50-55. (Summary).

Martin, J. R. Not dated. Product life cycle management. Management And Accounting Web. http://maaw.info/PLCSummary.htm

Moores, K. and S. Yuen. 2001. Management accounting systems and organizational configuration: A life-cycle perspective. Accounting, Organizations and Society 26(4-5): 351-389. (Summary).

Porter, M. E. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors. Chapter 8: Industry Evolution. The Free Press. (Summary).

Shields M. D. and S. M. Young. 1991. Managing product life cycle costs: An organizational model. Journal of Cost Management (Fall): 39-51. (Summary).