ACCA Applied Skills · Performance Management

Life-cycle costing: formula sheet

Full chapter guide

Key formulas

Stage pattern: sales: Introduction: low → Growth: rising fast → Maturity: peak, flat → Decline: falling; Use this to identify the stage from the data in a scenario.
Stage pattern: profit: Introduction: loss → Growth: rising profit → Maturity: highest profit → Decline: falling profit; A general pattern. Individual products can differ.
Stage pattern: cash flow: Introduction: strongly negative → Growth: improving, may still be negative → Maturity: strongly positive → Decline: positive but falling; Cash flow lags profit in growth because of working capital and capacity investment.
Total life cycle profit: Total life cycle profit = Total lifetime revenue − Total lifetime costs (pre-production + production + marketing + end of life); Costs before launch must be recovered over the life of the product.
Total life cycle cost: Total life cycle cost = pre-production costs + production costs + selling, distribution and service costs + end-of-life costs; Add up costs over the whole life, not one period. Include every stage the question gives.
Life cycle profit: Life cycle profit = total life cycle revenue − total life cycle cost; Use this to judge if a product pays back over its whole life.
Life cycle cost per unit: Cost per unit = total life cycle cost ÷ total units produced and sold over the life; Use total lifetime units. Do not use one year's volume.
Total life cycle cost: Total life cycle cost = pre-production costs + production costs + marketing and distribution costs + customer service costs + end-of-life costs; Include every cost across all periods. Use only the categories given in the question.
Life cycle cost per unit: Life cycle cost per unit = total life cycle cost ÷ total lifetime units produced (or sold); Use the units the question says the costs relate to. Check whether to divide by units produced or sold.
Life cycle profit: Life cycle profit = total lifetime revenue − total life cycle cost; Profit per unit = life cycle profit ÷ lifetime units, or selling price − life cycle cost per unit.
Discounted cash flow: Present value = cash flow × discount factor (or cash flow ÷ (1 + r)ⁿ); Use the factors given. Year 0 has a factor of 1. Life cycle NPV = sum of present values.
Cumulative total: Cumulative figure in year n = cumulative figure in year n − 1 + net figure in year n; Useful when asked about payback or when a loss is recovered.
Total life cycle cost: Total life cycle cost = pre-production costs + production costs + distribution and marketing costs + after-sales and service costs + end-of-life costs; Add all costs over the whole life. Include only the cost categories that apply to the product in the question.
Life cycle cost per unit: Life cycle cost per unit = total life cycle cost ÷ total units over the life; Use total units across the whole life, not one year's volume.
Percentage of cost committed: Committed % at a stage = cumulative cost committed ÷ total life cost × 100; Compare with the percentage actually incurred at that stage. Committed is usually far higher than incurred early on.
Life cycle profit check: Life cycle profit = total life revenue − total life cycle cost; Positive means the product recovers its full cost over its life. Consider discounting if the question asks for it.

Quick revision

The product life cycle has development, introduction, growth, maturity and decline stages, with withdrawal at the end.
Life-cycle costing collects all costs of a product over its whole life, from design to disposal.
It reports lifetime profitability, not period-by-period profit.
Most of a product's costs are committed at the design stage, though few have been spent by then.
Spending more on design and development can lower later production and service costs.
Cost per unit over the life = total lifetime costs ÷ total lifetime units.
Compare lifetime cost with lifetime revenue to judge if early costs are recovered.
Include end-of-life costs such as decommissioning or disposal when the question gives them.
Pricing strategy varies by stage; skimming is often used at launch of new products and penetration to gain share.
Benefits: better pricing, planning and cost control, and visibility of total costs.
Limitations: forecasts are uncertain, data is hard to collect and the product life may be short or unclear.
Link to target costing: aim to design the product so lifetime cost fits the target.

Common mistakes

Saying profit is highest in growth because sales are rising fastest. Fix: Remember that maturity usually gives the highest profit and cash flow because unit costs are lowest and promotion spending has stabilised.
Assuming every product follows the same smooth curve. Fix: Say the model is a general guide. Mention that fashion goods, failed launches and extended products can differ.
Leaving out pre-production or end-of-life costs. Fix: Always check the start and end of the timeline. Ask what was spent before launch and what will be spent at withdrawal.
Dividing total life cost by one year's units to get cost per unit. Fix: Use total units over the whole life. The total cost and the units must cover the same period.
Leaving out pre-production costs such as R&D and design Fix: Always check for year 0 or pre-launch items first, and tick off every cost listed in the question.
Ignoring end-of-life costs like disposal or decommissioning Fix: Scan the last period of the data for closing costs and include them in the total.
Treating committed costs and incurred costs as the same thing. Fix: Committed means fixed by a decision. Incurred means actually spent. Costs are committed early and incurred later.
Leaving out pre-production or end-of-life costs when calculating life cost. Fix: Go through every stage in the question and tick each cost off before adding.

Exam tips

Always identify the stage from evidence in the scenario and quote the figures that support your choice.
In written answers, cover sales, costs, cash flow and pricing or action. A one-line label earns few marks.
Link stages to pricing strategies: skimming or penetration at introduction, competitive pricing and cost control at maturity.
Remember that objective test answers are all or nothing, so check every clue before choosing.
If life cycle costing is mentioned, stress that most costs are determined at the design stage.
In written answers, name the stages (pre-production, production, selling and support, end of life) and give a short example for each.
In numerical questions, check that costs and units cover the same time span before dividing.
For a compare question, give at least two clear differences: time span and treatment of early or late costs.