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

Summary by Henry Stoll
Master of Accountancy Program
University of South Florida, Fall 2000

Budgeting Main Page | Investment Management Main page | PLC Main Page

Budgeting traditionally has not taken the life cycle of an entity into account; therefore, resources are not allocated efficiently. The purpose of this paper is to show how the budgetary process can be improved by properly implementing product life cycle analysis with planning, control, and motivation.

Product Life Cycle Costing

Product life cycle costing has been used for years for sales forecasting. A study at Lear Siegler, Inc. revealed that PLC is useful in allocating resources. Revenues, expenses, and cash flows have distinctive characteristics at each stage. The PLC stages include:

Maturity, and

3 Main Functions of Budgeting

1. Planning - The development of future objectives and goals and also the formulation of steps necessary to achieve those objectives and goals.

2. Control - Policies and procedures established to ensure the organization functions as it should and that the objectives are met.

3. Motivation - The force within individuals by which behavior is initiated, energized, sustained, directed, and stopped.

Product Life Cycle Diagram
PLC Stage Sales Expenses Other Indicators
and Activities
Start-up Low or zero High research, product development, capital expenditures. High PPE to meet projected demand. Shortage of cash. Low ROA. Low earnings. Low working capital. High inventory turnover and High debt. Entrepreneurial Management Style - Emphasis on market research and product development.
Growth Rising sales Increase promotional and production costs. Increase in IT and administrative costs. Increased purchases of production assets. Marketable product. Low cash flow. Increase in earnings. Management style - Formal system of marketing, production, and accounting.
Maturity Stable Cost of searching for increased efficiencies. Increased administrative costs. Most cost are stable. Historical data can be used to predict future. Standards developed for budgeting. Large net income. Investment in product peaks. Administrative style - Emphasis on monitoring existing systems.
Harvest Some decline Reduced personnel and advertising costs. No new investments. High ROA. Low earnings. Some increased revenue from equipment sales. Realistic style - Must face fact that winding down is needed. Purchases and production must be tied to sales.

Budget Functions in Relation to PLC Stages
PLC Stage Main Functions of a Budget
Planning Control Motivation
Start-up Low priority because the main concern is producing and selling product. Low priority because controls could impede creative process. Low priority because employees haven't yet seen results. Employees need self motivation.
Growth Increased priority due to increase in productive capacity and employees. More resources increase need for control, but priority is still relatively low. Increase in sales and routine job descriptions increase the importance of motivation from budgets.
Maturity Even more priority due to price competition. Increased competition requires highest quality and lowest cost. Control is essential. Even more need for motivation. Employees forced to follow standards and see only a small piece of the whole process.
Harvest Somewhat important. Must plan when and how to drop products. Decreased priority because of less competition. Timing is still important. Motivation is essential. Employees see phase-out of product and possibly themselves.


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).

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

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

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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).