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Performance Management · Life-cycle costing

Life Cycle Costing Calculations for ACCA PM

Updated 11 October 2026 · Fact-checked

Life cycle costing totals all costs of a product from design to final withdrawal, including pre-launch and end-of-life costs. Divide total life cycle cost by total lifetime units to get cost per unit. Subtract it from lifetime revenue for profit. If asked, discount each year's cash flow first.

Understand Life Cycle Costing Calculations

A normal costing view looks at one year. Life cycle costing looks at the whole life of a product: research and development, design, production, marketing, distribution, customer service and final disposal or decommissioning.

Why does this matter? Many costs are committed early, often in design, but are spent later. A product may look profitable in any one year and still fail to recover its development cost over its life. Adding up everything shows the true lifetime return.

The calculation is mostly careful arithmetic. You list costs and revenues by period or by cost type, total them, and then divide by lifetime units. The skill is not missing a cost, such as a launch cost in year 0 or a disposal cost at the end.

Some questions ask for a cumulative figure, for example cumulative profit at the end of each year. Others bring in the time value of money. Then you discount each year's net cash flow, which gives a life cycle net present value.

Watch the wording. Life cycle cost per unit is a total-cost measure. It is not the same as the cost in one year, and it is not the same as the selling price.

Key rules to remember

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.

How to solve Life Cycle Costing Calculations questions

Use the same layout for any life cycle costing question. A clear table earns method marks and avoids missed items.

  1. 1Read the requirement. Decide if you need total cost, cost per unit, profit, cumulative position or NPV.
  2. 2Draw a table with periods across the top (year 0, 1, 2 and so on) or cost categories down the side.
  3. 3Enter every cost in the correct period. Include pre-launch costs, such as R&D and design, and end-of-life costs.
  4. 4Calculate any variable costs as units × cost per unit, and check which units the data refers to.
  5. 5Total the costs and revenues. Add the lifetime units.
  6. 6Divide total cost by lifetime units for cost per unit. Subtract total cost from total revenue for profit.
  7. 7If discounting is required, multiply each year's net cash flow by its discount factor and sum. Do not mix discounted and undiscounted figures.
  8. 8Check the answer is sensible. Compare cost per unit with the selling price and state a brief conclusion if asked.

Quickest way: Cost category totals, then divide

When to use it: Use this for Section A and OT case questions where you only need total cost, cost per unit or profit and there is no discounting.

  1. Total each cost category across all years first, so you have a few lines rather than a grid.
  2. Add the categories to get total life cycle cost.
  3. Divide by total lifetime units for cost per unit.
  4. Cross-check by computing profit per unit: price − cost per unit, then × units, and compare with total profit.
  5. Look at the options. Eliminate any that equal a single year's figure or leave out pre-launch costs.

Common mistakes in Life Cycle Costing Calculations

  • Leaving out pre-production costs such as R&D and design

    Students focus on the years where sales occur and treat year 0 as a side note.

    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

    These costs come in the final year and are easy to overlook.

    Fix: Scan the last period of the data for closing costs and include them in the total.

  • Dividing by the wrong number of units

    Students use one year's units or sales units when the costs relate to production units.

    Fix: Use total lifetime units, and read whether the question refers to units produced or sold.

  • Discounting some items but not others

    Students discount the revenues but forget year 0 or the end-of-life cost.

    Fix: Put every cash flow in the table with its discount factor. Year 0 uses a factor of 1.

  • Using cost per unit from one year to judge profitability

    Students compare a single year's cost per unit with the price.

    Fix: Compare the full life cycle cost per unit with the price. A year may show profit while the life cycle shows a loss.

  • Including sunk or non-cash items in a discounted calculation

    Students copy every number given, including allocated overheads or depreciation.

    Fix: For discounted work use cash flows only. Leave out non-cash items unless the question tells you otherwise.

Worked examples

Example 1

A product has a four-year life. Design and development cost ₹12,00,000 before launch. Production is 20,000 units in each of the four years at a variable cost of ₹150 per unit. Marketing costs ₹3,00,000 per year. End-of-life disposal costs ₹2,00,000. The selling price is ₹320 per unit and all units produced are sold. Calculate the life cycle cost per unit and the life cycle profit.

Show the solution
  1. Lifetime units = 20,000 × 4 = 80,000 units.
  2. Production cost = 80,000 × ₹150 = ₹1,20,00,000.
  3. Marketing cost = ₹3,00,000 × 4 = ₹12,00,000.
  4. Total life cycle cost = ₹12,00,000 + ₹1,20,00,000 + ₹12,00,000 + ₹2,00,000 = ₹1,46,00,000.
  5. Cost per unit = ₹1,46,00,000 ÷ 80,000 = ₹182.50.
  6. Revenue = 80,000 × ₹320 = ₹2,56,00,000.
  7. Profit = ₹2,56,00,000 − ₹1,46,00,000 = ₹1,10,00,000.

Answer: Life cycle cost per unit is ₹182.50 and life cycle profit is ₹1,10,00,000.

Example 2

A project has these cash flows: year 0 development cost ₹10,00,000 (outflow); year 1 net inflow ₹6,00,000; year 2 net inflow ₹8,00,000; year 3 net outflow ₹2,00,000 for decommissioning. The discount rate is 10%. Discount factors: year 1 0.909, year 2 0.826, year 3 0.751. Calculate the cumulative undiscounted cash flow and the life cycle NPV.

Show the solution
  1. Undiscounted cumulative: year 0 = −₹10,00,000.
  2. Year 1 = −₹10,00,000 + ₹6,00,000 = −₹4,00,000.
  3. Year 2 = −₹4,00,000 + ₹8,00,000 = ₹4,00,000.
  4. Year 3 = ₹4,00,000 − ₹2,00,000 = ₹2,00,000.
  5. Present values: year 0 = −₹10,00,000 × 1 = −₹10,00,000.
  6. Year 1 = ₹6,00,000 × 0.909 = ₹5,45,400.
  7. Year 2 = ₹8,00,000 × 0.826 = ₹6,60,800.
  8. Year 3 = −₹2,00,000 × 0.751 = −₹1,50,200.
  9. NPV = −10,00,000 + 5,45,400 + 6,60,800 − 1,50,200 = ₹56,000.

Answer: Cumulative undiscounted cash flow ends at ₹2,00,000, and the life cycle NPV is ₹56,000.

Exam tips

  • Write the cost categories as a list before calculating. This stops you missing year 0 and end-of-life items.
  • Read whether the question wants total, per unit, profit or NPV. Many wrong OT answers are right calculations of the wrong measure.
  • In Section C, show a clear table and label each line. Marks are often given for correct treatment of individual items.
  • If a comment is asked, link to the product life cycle: high early costs must be recovered over the life, and decisions at design stage lock in much of the cost.
  • Use the discount factors supplied and do not round early. Keep the figures in whole rupees until the final answer.

Practice questions from Life-cycle costing

Life Cycle Costing Calculations 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 Calculations: frequently asked questions

How do you calculate life cycle cost per unit?

Add all costs from design to disposal to get total life cycle cost. Divide by the total lifetime units. Make sure you use the units that the costs relate to, normally units produced.

Do you discount in life cycle costing?

Only if the question asks for it or gives a cost of capital. In that case discount each year's cash flow and sum to get a life cycle NPV. Otherwise just total the costs.

What costs are included in life cycle costing?

All costs over the product's whole life: R&D, design, production, marketing, distribution, customer service and end-of-life costs. Include only what the question gives you.

How is life cycle costing different from target costing?

Life cycle costing totals costs over the whole life to see lifetime cost and profit. Target costing starts from the market price and works back to a cost the product must achieve. Both aim to manage cost early in the life.