CMA Final · Strategic Cost Management

Asset Life Cycle Costing: formula sheet

Full chapter guide

Key formulas

Total life cycle cost: Life cycle cost = Pre-production costs + Production/acquisition costs + Operation and maintenance costs + Disposal costs; Add every phase. Use the cost heads given in the question; do not invent extra ones.
Life cycle cost per unit: LCC per unit = Total life cycle cost ÷ Total units produced over life; Use lifetime units, not one year's units.
Life cycle profit check: Life cycle profit = Total life revenue − Total life cycle cost; A product must recover all phases, including design and disposal, before it earns a true profit.
Discounted life cycle cost: PV of LCC = Σ [Cost in year t ÷ (1 + r)^t]; Use when the question gives a discount rate and costs fall in different years.
Total life cycle cost: Life cycle cost = Pre-production costs + Production costs + Post-production costs; Pre-production = R&D, design, development, tooling. Post-production = warranty, service, withdrawal, disposal.
Life cycle cost per unit: Cost per unit = Total life cycle cost ÷ Total units produced and sold over the life; Use lifetime units, not one year's units.
Life cycle profit: Life cycle profit = Total lifetime revenue − Total life cycle cost; Disposal proceeds (salvage) reduce cost or add to revenue. Say which treatment you use.
Cost commitment versus cost incurred: Committed cost (design stage) is high; incurred cash cost (design stage) is low; A conceptual rule, not a fixed percentage. Do not quote figures unless the question gives them.
Total life cycle cost (undiscounted): LCC = Acquisition + Operating + Maintenance + Disposal cost; Deduct salvage or scrap proceeds from disposal cost.
Discounted life cycle cost: LCC = Acquisition cost + Σ [Running costs in year t ÷ (1 + r)^t] + PV of net disposal cost; Use when the question gives a discount rate. Acquisition cost at time 0 is not discounted.
Annuity present value: PV = Annual cost × [1 − (1 + r)^−n] ÷ r; Use for equal yearly operating or maintenance costs over n years.
Cost committed vs incurred: Cumulative % committed ≥ Cumulative % incurred in early phases; Committed cost rises early; incurred cost follows later. It is a concept, not a fixed ratio.
Equivalent annual cost: EAC = LCC (present value) ÷ Annuity factor for n years; Use to compare assets with unequal lives.
Total life cycle cost: Total LCC = Upstream costs (R&D, design) + Manufacturing costs + Marketing and distribution costs + After-sales and warranty costs + Disposal costs; Fixed costs are counted once for the whole life. Variable costs are rate × lifetime units.
Life cycle cost per unit: LCC per unit = Total LCC ÷ Total units produced and sold over the life; Use the lifetime volume given in the question, not one year's volume.
Lifetime profit: Lifetime profit = Total lifetime revenue − Total LCC; Revenue = lifetime units × selling price. If prices change by phase, add up each phase.
Price for a target margin: Price = LCC per unit ÷ (1 − margin on sales), or LCC per unit × (1 + mark-up on cost); Check whether the target is on sales or on cost.
Present value of a single amount: PV = Amount × 1 ÷ (1 + r)^n; r is the discount rate per year. n is the year in which the cash flow occurs.
Present value of an equal annual amount: PV = Annual amount × Annuity factor, where annuity factor = [1 − (1 + r)^−n] ÷ r; Use the factor given in the question if the table is supplied.
Discounted life cycle cost: PV of LCC = Initial cost + PV of running costs + PV of disposal cost − PV of salvage value; Salvage or resale proceeds are inflows, so they reduce the cost. Choose the lowest PV of cost.
Equivalent annual cost: EAC = PV of LCC ÷ Annuity factor for the asset's life; Use it when the alternatives have unequal lives.
Total life cycle cost: Life cycle cost = Upstream cost (R&D, design, development) + Manufacturing and logistics cost + Downstream cost (marketing, service, warranty, disposal); For assets: acquisition + operating + maintenance + disposal cost, less salvage value.
Life cycle cost per unit: LCC per unit = Total life cycle cost ÷ Total lifetime units; Use as the base for cost-plus pricing over the whole life.
Life cycle price: Price per unit = LCC per unit + Required profit per unit; Or Price = LCC per unit ÷ (1 − profit % on sales).
Target cost: Target cost = Target price − Target profit; Compare with estimated life cycle cost. Gap to be closed by value engineering.
Present value of LCC: PV of LCC = Initial cost + Σ [Running cost in year t × discount factor] − PV of salvage; Choose the option with the lowest PV of cost when benefits are equal.
Equivalent annual cost: EAC = PV of LCC ÷ Annuity factor for the asset's life; Use to compare assets with unequal lives, as in replacement choices.

Quick revision

Life cycle costing covers all costs from idea to disposal.
Normal costing looks at one period; life cycle costing looks at the whole life.
Typical stages: introduction, growth, maturity, decline.
Pre-launch costs include research, design and development.
Most of the cost is committed early, though cash is spent later.
Design-stage changes save far more than changes made during production.
Operating costs include running, maintenance and support.
End-of-life costs include disposal, decommissioning and any residual value.
Compare options on total life cost, not purchase price alone.
Use present values only when a discount rate is given.
Always end a numerical with a clear recommendation.
Pricing must recover the full life cost plus the required return.

Common mistakes

Treating LCC as the same as the purchase price or one year's cost. Fix: Always say LCC covers all phases from design to disposal, and add all of them.
Leaving out R&D, design or disposal costs in the total. Fix: Scan the question for every cost item and place each in a phase before adding.
Treating R&D and design as period costs and leaving them out of product cost. Fix: In life cycle costing, include all pre-production costs in the product's lifetime cost.
Ignoring post-production costs such as warranty, service and disposal. Fix: Always check the question for after-sales and disposal items and include them.
Choosing the asset with the lowest purchase price. Fix: Always compute total LCC. Running and disposal costs can outweigh the price gap.
Mixing up cost committed and cost incurred. Fix: Committed means the decision fixes the cost. Incurred means cash is actually spent. Commitment comes first and is much higher early.
Multiplying a lifetime fixed cost, such as R&D or tooling, by the number of units. Fix: Read the wording. If the cost is stated as a total or lump sum, add it once. Multiply only costs given per unit.
Leaving out pre-production and end-of-life costs, such as design, setup, decommissioning and disposal. Fix: Build the phase table every time and tick off each phase. A blank row should be a conscious decision, not an oversight.
Pricing on production cost only and ignoring R&D and disposal. Fix: List all phases first and include upstream and downstream costs in the total.
Adding cash flows of different years without discounting. Fix: If a discount rate is given, always use present values. Compare only like with like.

Exam tips

For a 'distinguish' question, write in short points under clear heads such as time frame, coverage and decision use. Examiners reward structure.
In MCQs, watch the words 'committed' and 'incurred'. Most life cost is committed at design, not incurred.
In numerical questions, tick off every cost given against a phase so none is missed, and use lifetime units for the per-unit figure.
End application answers with a recommendation, for example price, redesign or choose the lower life cost option.
Keep one line each ready for meaning, objectives, benefits and limitations; these are the usual theory asks.
In theory answers, name each stage and give its cost pattern in one line. Marks follow stage-wise coverage.
In numericals, show the three-way classification before totalling. It earns method marks even if arithmetic slips.
Always include disposal and salvage. Examiners often hide one of them in the data.