Strategic Cost Management · Asset Life Cycle Costing

Life Cycle Costing in Decision Making and Pricing

Updated 11 October 2026 · Fact-checked

Life cycle costing totals all costs of a product or asset from design to disposal. For decisions, you compare options on total life cycle cost, or set a price that recovers the whole life cycle cost plus profit. Choose the lowest cost, or the price that covers all phases. Use present values when timing differs.

Understand Life Cycle Costing in Decision Making and Pricing

Life cycle costing (LCC) looks at the whole cost of a product or asset across its life. It includes research and design, development, purchase or production, operation, maintenance, and end-of-life costs such as disposal or decommissioning. Traditional costing looks only at one period. LCC looks at everything.

Why does this matter for decisions? Most of a product's cost is committed early, during design and planning, even though the cash is spent later. A choice made at design stage locks in much of the later cost. So LCC pushes you to think about cost before you spend it.

For pricing, a product must recover its costs over the whole life, not just in one year. Upfront costs such as R&D and launch are huge in early years, and sales are low then. If you price each year on that year's cost, you may set a wrong price. Instead, you estimate total life cycle cost and total volume, and set prices so that the total revenue covers it with a profit.

For target costing, you begin with a market price and a required profit, and work back to an allowable cost. LCC supplies the full-life view of that cost, so the target covers design to disposal. Value engineering then reduces cost in the design stage, where it has most effect.

For asset selection, replacement and make-or-buy, you compare options on total cost of ownership, usually discounted to present value. A cheaper machine to buy can cost more to run. LCC shows this. Always include only relevant, future, differential cash flows in replacement and make-or-buy choices.

Key rules to remember

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.

How to solve Life Cycle Costing in Decision Making and Pricing questions

Use this method for any LCC decision or pricing question.

1Read the decision asked: price, target cost, asset choice, replacement, or make-or-buy.
2List all cost phases: upstream, production, downstream, and disposal. Do not miss any.
3Remove sunk and non-differential costs for replacement and make-or-buy choices.
4If cash flows occur in different years, discount them using the rate given. Otherwise total them.
5Convert to per-unit cost, or to equivalent annual cost if lives differ.
6Apply the decision rule: lowest cost, price covering full cost plus profit, or cost gap against target.
7State a clear recommendation and mention non-financial factors, such as quality and risk.

Quickest way: Phase table and rule

When to use it: Use for numerical questions when time is short.

Draw a small table with phases as rows and options or years as columns.
Fill in figures from the question, tick off each phase to avoid omissions.
Total each option, discounting only if the question gives a rate.
For price, divide total cost by total units, then add profit.
Write the answer in one line: option chosen or price set, with the figure.

Common mistakes in Life Cycle Costing in Decision Making and Pricing

Pricing on production cost only and ignoring R&D and disposal.
Students are used to period costing.
Fix: List all phases first and include upstream and downstream costs in the total.
Adding cash flows of different years without discounting.
The question looks like a simple cost total.
Fix: If a discount rate is given, always use present values. Compare only like with like.
Including sunk costs, such as the book value of an old machine, in a replacement decision.
Students treat all figures given as relevant.
Fix: Use only future cash flows that differ. The old machine's sale value is relevant; its book value is not.
Comparing assets of unequal life by total cost alone.
Students forget the cost covers different periods.
Fix: Use equivalent annual cost or a common time horizon.
Treating target costing and LCC as unrelated.
They are taught as separate topics.
Fix: Say that target cost is set from market price and is checked against full life cycle cost. Value engineering closes the gap.
Recommending purely on cost and ignoring quality or risk.
Students stop after the calculation.
Fix: Add one line on non-financial factors, then give the recommendation.

Worked examples

Example 1

A company plans a new product. Life cycle costs: R&D and design ₹12,00,000; production ₹30 per unit; marketing and distribution ₹6,00,000 in total; warranty and disposal ₹3,00,000 in total. Lifetime sales are 50,000 units. The company wants a profit of 20% on selling price. Find the life cycle price per unit (ignore time value).

Show the solution

Production cost = 50,000 × ₹30 = ₹15,00,000.
Total life cycle cost = 12,00,000 + 15,00,000 + 6,00,000 + 3,00,000 = ₹36,00,000.
LCC per unit = 36,00,000 ÷ 50,000 = ₹72.
Profit is 20% of price, so cost is 80% of price.
Price = 72 ÷ 0.80 = ₹90.

Answer: The life cycle price is ₹90 per unit.

Example 2

Machine A costs ₹5,00,000, running cost ₹1,00,000 a year for 3 years, no salvage. Machine B costs ₹3,50,000, running cost ₹1,60,000 a year for 3 years, no salvage. Both give the same output. Cost of capital is 10%. Annuity factor for 3 years at 10% is 2.487. Which machine should be chosen?

Show the solution

PV of running cost of A = 1,00,000 × 2.487 = ₹2,48,700.
PV of life cycle cost of A = 5,00,000 + 2,48,700 = ₹7,48,700.
PV of running cost of B = 1,60,000 × 2.487 = ₹3,97,920.
PV of life cycle cost of B = 3,50,000 + 3,97,920 = ₹7,47,920.
B has the lower present value of cost, by ₹780.
The gap is small, so quality, reliability and downtime may also matter.

Answer: Choose Machine B, with PV of life cycle cost ₹7,47,920 against ₹7,48,700 for A. The difference is small, so check non-financial factors.

Exam tips

Write the phases of the life cycle before any figures. It earns marks and prevents omissions.
In replacement questions, strike out sunk costs openly and say why.
Link LCC to target costing in theory answers: target price minus profit gives the allowable cost, tested across the full life.
Close every numerical answer with a recommendation and one qualitative point.
If the question gives a discount rate or annuity factor, it expects present values.

Practice questions from Asset Life Cycle Costing

Life Cycle Costing in Decision Making and Pricing 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 in Decision Making and Pricing: frequently asked questions

How does life cycle costing help in pricing?

It makes you recover all costs over the whole life, including R&D, launch, service and disposal. You divide the total by lifetime units and add profit. This avoids underpricing because early costs were left out.

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

Target costing starts from the market price and subtracts the required profit to get the allowable cost. Life cycle costing provides the full-life view of that cost. Together they push cost reduction into the design stage.

How is life cycle costing used in asset replacement?

You compare the present value of all future costs of keeping the old asset against replacing it. Include running costs, maintenance, salvage and disposal. Ignore sunk costs. Pick the lower cost, using equivalent annual cost if lives differ.

Do I always need to discount in life cycle costing questions?

Discount when the question gives a rate or factors and cash flows fall in different years. If it asks only for a total or unit cost without a rate, a simple total is enough.