CMA Final · Strategic Cost Management

Product Life Cycle Costing: formula sheet

Full chapter guide

Key formulas

Stages in order: Introduction → Growth → Maturity → Decline; Preceded by the pre-launch phase of research, design and development, where costs are incurred but no sales exist.
Total life cycle cost: Life cycle cost = Pre-production costs (R&D, design, development) + Production costs + Marketing and distribution costs + After-sales service and warranty costs + Disposal or abandonment costs; Use undiscounted totals unless the question asks for present values.
Life cycle profit: Life cycle profit = Total lifetime revenue − Total life cycle cost; Divide by total lifetime units for per-unit life cycle cost or profit.
Per-unit life cycle cost: Life cycle cost per unit = Total life cycle cost ÷ Total units produced and sold over life; Use this to set a price that recovers all costs, including pre-production costs.
Stage pattern: sales, profit, cost: Introduction: low sales, loss, high unit cost. Growth: rising sales, rising profit, falling unit cost. Maturity: peak or stable sales and profit, stable unit cost. Decline: falling sales and profit, cost per unit may rise.; State this as a typical pattern, not a certainty.
Total life cycle cost: Total LCC = Pre-production costs + Production costs + Post-production costs; Include every cost over the whole life. Use only the costs the question gives; if discounting is asked, use present values.
Life cycle cost per unit: LCC per unit = Total life cycle cost ÷ Total units produced and sold over the life; Use lifetime units, not one year's units. Units should be those expected to be sold over the full life.
Life cycle profit: Life cycle profit = Total lifetime revenue − Total life cycle cost; A product is worthwhile over its life only if this is positive.
Phase classification: Upstream = R&D, design, testing; Midstream = manufacturing; Downstream = marketing, distribution, service, disposal; Learn the standard grouping. If a cost has no clear phase, state your assumption.
Total life cycle cost: Total LCC = Pre-production costs + Production and selling costs + Post-sale costs; Include every stage. Use discounted values if a rate is given.
Life cycle cost per unit: LCC per unit = Total LCC ÷ Total units produced and sold over the life; Use lifetime units, not one year's units.
Lifetime profit: Lifetime profit = Total lifetime revenue − Total LCC; Check whether the question wants discounted or undiscounted profit.
Present value of a cash flow: PV = Cash flow × 1 ÷ (1 + r)^n; Use the discount factors given in the question. Do not mix timing conventions.
Cost commitment percentage: Cumulative committed % = Cumulative committed cost ÷ Total life cycle cost × 100; Compare with cumulative incurred % to show that commitment runs ahead of spending.
Life cycle cost: Total life cycle cost = Pre-production costs (R&D, design, testing) + Production costs + Marketing and distribution costs + After-sales and warranty costs + Disposal or decommissioning costs; Include every phase. Add only costs the question gives or that clearly arise in that phase.
Life cycle cost per unit: LCC 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; Compare with the cost-plus or target profit to judge viability.
Target cost: Target cost = Target selling price − Target profit; Cost gap = Estimated life cycle cost per unit − Target cost. A positive gap means cost must be reduced.
Discounted life cycle cost: PV of cost = Cash cost in year t ÷ (1 + r)^t; Use when the question gives a discount rate and cash flows over several years.

Quick revision

Life cycle stages: introduction, growth, maturity, decline.
Life cycle costing covers cost from design to disposal, not just production.
Early-stage decisions commit most of the product's total cost.
Pre-production costs include research, design, development and testing.
Production-phase costs include materials, labour, overheads and tooling.
After-sale costs include warranty, service and disposal or decommissioning.
Lifetime cost per unit = total lifetime cost ÷ total lifetime units.
Lifetime profit = lifetime revenue − lifetime cost.
Always check whether a cost is for the whole life or per year before dividing.
Life cycle costing supports pricing, launch and drop decisions.
It links to target costing because both aim to manage cost at the design stage.
Limitations include forecasting difficulty and the effort of collecting data across phases.

Common mistakes

Saying profit is highest in the growth stage because sales grow fastest. Fix: Remember that profit typically peaks in late growth or maturity. Growth is where profit first turns positive and rises.
Ignoring pre-production costs such as R&D when computing life cycle cost per unit. Fix: Always include research, design and development in the life cycle total, then spread over total lifetime units.
Dividing R&D and design cost by one year's units instead of lifetime units. Fix: Spread upstream and downstream lump sums over total units over the whole life, unless the question asks for a yearly view.
Treating marketing, distribution and warranty as period costs and leaving them out of the product cost. Fix: In LCC, include all costs from cradle to grave. Marketing, distribution, service and disposal are part of the product's life cycle cost.
Dividing total life cycle cost by one year's units. Fix: Always divide by total units over the whole life, as the lump sums are spread over all of them.
Leaving out pre-production or post-sale costs. Fix: List all three stages in your table before computing anything.
Leaving out pre-production and after-sales costs. Fix: Go through every phase and tick each one before totalling.
Dividing total life cycle cost by one year's units. Fix: Use total units over the whole life.

Exam tips

In MCQs, match both the sales and profit clues to the stage. One clue alone can mislead.
In descriptive answers, structure by stage with a short point on cost, revenue and profit each, then add a recommendation. Examiners reward application over definitions.
For life cycle numericals, show the phase-wise cost table clearly. Marks are often given for each correctly included cost head.
Include pre-production and disposal costs in the total. Missing them is the commonest way to lose marks.
Mention that the PLC is a model and stage lengths vary. A single line of limitation adds balance.
In MCQs, first decide the phase. Questions often ask which cost is upstream or downstream; R&D and design are upstream, distribution and service are downstream.
In numericals, show phase subtotals. Marks are awarded for classification as well as for the final figure.
Check whether the question gives per-unit costs or lump sums, and use lifetime units to convert.