Management Accounting · Alternative cost accounting principles

Life Cycle Costing and Target Costing Explained for ACCA MA

Updated 11 October 2026 · Fact-checked

Life cycle costing tracks all costs of a product from development to withdrawal, so you judge profitability over its whole life. Target costing starts from the market: target cost = selling price − required profit. Cost gap = expected cost − target cost. If the gap is positive, you must cut costs.

Understand Life Cycle Costing and Target Costing

Most costing systems report costs one period at a time. That can hide the true cost of a product. Some products carry big costs before the first sale, such as design and testing. Others carry big costs after the sale, such as warranty and disposal. Life cycle costing collects all of these costs across the product's life, so you see total profit, not just profit in one year.

The life cycle has typical stages: development (research, design, testing; heavy spending, no sales), introduction (launch, marketing, low sales), growth (sales rise, unit costs fall), maturity (sales peak, costs stable), and decline (sales fall, product is withdrawn). Some versions add disposal or decommissioning costs at the end. Many costs are decided early, at the design stage, even though they are paid later. So spending more on design can lower later costs.

Target costing works the other way round. Normal costing builds up a cost and then adds a margin to get a price. Target costing starts with the price the market will accept. You then take away the profit the business needs. What is left is the target cost. The product must be made for no more than this.

Next you compare the target cost with the cost you expect to achieve with current methods. The difference is the cost gap. If expected cost is higher than target cost, you have a gap to close. Teams close it by redesigning the product, cutting waste, using cheaper materials, or negotiating with suppliers. Tools such as value engineering are often used.

The two ideas differ in focus. Life cycle costing looks at the whole life of a product and its total costs. Target costing is a cost reduction tool that works back from price. They fit together: target costing can be applied to life cycle costs, so the target covers all costs across the life of the product.

Key formulas to remember

Target cost: Target cost = Target selling price − Target profit; Profit can be given as an amount per unit or as a percentage of selling price. If it is a percentage of cost, convert carefully.
Cost gap: Cost gap = Expected cost − Target cost; A positive gap means costs must fall. A zero or negative gap means the target is met.
Total life cycle cost: Life cycle cost = Development + Introduction + Growth + Maturity + Decline (and disposal) costs; Add all costs from all stages. Compare with total revenue over the same life to get lifetime profit.
Life cycle cost per unit: Cost per unit = Total life cycle cost ÷ Total units over the life; Use total units for the whole life, not one year's units.

How to solve Life Cycle Costing and Target Costing questions

Use this method for any question on life cycle costing or target costing. First decide which technique the question wants.

1Read the requirement. Does it ask for a target cost, a cost gap, a life cycle total, or a written comparison?
2For target costing, find the selling price the market will accept. Use the target price, not the current cost-plus price.
3Work out the required profit per unit. If it is a percentage, check whether it is on selling price or on cost.
4Calculate target cost = price − required profit.
5Calculate the cost gap = expected cost − target cost. State whether costs must fall.
6For life cycle costing, list the costs by stage and add them up. Include costs before sales (development) and after sales (disposal).
7Divide by total lifetime units if cost per unit is needed, and compare with lifetime revenue if profit is needed.
8Write a clear conclusion in one line, such as whether the product is worth launching or how big the gap is.

Quickest way: Fast route for objective test questions

When to use it: Use this for number entry and multiple choice questions where you have about 70 seconds per two-mark question.

Circle the price, the profit and the expected cost in the question.
Check if profit is on selling price. If so, profit = percentage × price.
Subtract to get the target cost, then subtract again to get the gap.
Check the sign. A gap above zero means cost reduction is needed.
For life cycle questions, add all stage costs once, then divide by total units if asked.
Round only at the end, and match the unit asked for (per unit or total).

Common mistakes in Life Cycle Costing and Target Costing

Calculating the cost gap as target cost − expected cost.
Students reverse the order and get the wrong sign.
Fix: Always write expected cost first: gap = expected cost − target cost. A positive answer means costs are too high.
Applying a profit margin percentage to cost when it was given on selling price.
Students are used to mark-up on cost.
Fix: Read the wording. Margin on price means profit = % × price. Mark-up on cost means price = cost × (1 + %).
Using only the costs of the maturity stage when working out life cycle cost.
Students focus on production costs and forget costs before and after sales.
Fix: Include development, launch, and disposal costs. Check each stage has been added.
Dividing life cycle cost by one year's units.
Students mix annual and lifetime figures.
Fix: Use total lifetime costs and total lifetime units together.
Saying target costing builds a price from cost plus margin.
Students confuse it with cost-plus pricing.
Fix: Target costing starts with the market price and works backwards to find the cost allowed.
Thinking life cycle costing ignores costs decided early.
Students overlook that most costs are fixed at the design stage.
Fix: Remember that design decisions lock in much of the later cost, so early spending can reduce total life cost.

Worked examples

Example 1

A company plans to launch a product. Market research says customers will pay $80 per unit. The company requires a profit of 25% of selling price. Expected cost with current methods is $64 per unit. Calculate the target cost and the cost gap.

Show the solution

Required profit = 25% × $80 = $20 per unit.
Target cost = $80 − $20 = $60 per unit.
Cost gap = expected cost − target cost = $64 − $60 = $4 per unit.
The gap is positive, so costs must fall by $4 per unit.

Answer: Target cost is $60 per unit and the cost gap is $4 per unit, so costs must be reduced.

Example 2

A product has these lifetime costs: development $200,000; introduction (marketing) $100,000; production over growth, maturity and decline $1,500,000; disposal $50,000. Total lifetime sales are 100,000 units at $22 each. Calculate the life cycle cost per unit and the lifetime profit.

Show the solution

Total life cycle cost = $200,000 + $100,000 + $1,500,000 + $50,000 = $1,850,000.
Cost per unit = $1,850,000 ÷ 100,000 = $18.50.
Lifetime revenue = 100,000 × $22 = $2,200,000.
Lifetime profit = $2,200,000 − $1,850,000 = $350,000.

Answer: Life cycle cost per unit is $18.50 and lifetime profit is $350,000.

Exam tips

Read whether profit is a percentage of price or of cost before you calculate anything.
Write the gap formula with expected cost first, so the sign is right every time.
For life cycle questions, tick off every stage so you do not miss development or disposal costs.
In written-style items, state the key contrast: life cycle costing covers total costs over the whole life, while target costing works back from price to a cost limit.
With multiple response questions, pick exactly the number asked. Look for true statements about early-stage cost commitment and cost reduction.

Practice questions from Alternative cost accounting principles

Life Cycle Costing and Target Costing in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Life Cycle Costing and Target Costing: frequently asked questions

What are the stages of the product life cycle in ACCA MA?

The usual stages are development, introduction, growth, maturity and decline. Disposal costs may arise at the end. Costs and sales differ at each stage, which is why life cycle costing looks at them together.

How do you calculate target cost and the cost gap?

Target cost = target selling price − required profit. Cost gap = expected cost − target cost. A positive gap means you need to cut costs to meet the target.

What is the difference between life cycle costing and target costing?

Life cycle costing totals all costs of a product across its whole life. Target costing starts from the market price, deducts required profit, and sets a maximum cost. One is about total lifetime cost, the other is about cost reduction from a market price.

Why does life cycle costing matter for decisions?

A product can look profitable in one period but lose money over its whole life once development and disposal costs are counted. It also shows that early design choices fix much of the later cost.