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Strategic Cost Management · Product Life Cycle Costing

Benefits, Limitations and Target Costing Link of Life Cycle Costing

Updated 11 October 2026 · Fact-checked

Life cycle costing (LCC) tracks all costs of a product from design to withdrawal, including pre-production and after-sales costs. Its benefits are better pricing, early cost control and better design choices. Its limits are estimation difficulty and data needs. To solve questions, total the costs across all phases, compare them with lifetime revenue, and recommend.

Understand Benefits, Limitations and Link to Target Costing

Traditional cost accounting reports cost period by period, mostly from the start of production. It treats research, design and development as period expenses. It also ignores costs after sale, such as warranty and disposal. So a product can look profitable in each period and still lose money over its whole life.

Life cycle costing fixes this by collecting all costs over the product's life: design and development, production, marketing, distribution, after-sales service, and decommissioning or disposal. It is a cumulative view, not a period view. Revenue is set against the same life span, so you see lifetime profit.

The key idea is cost commitment. Most of a product's lifetime cost is locked in during design, even though little cash has been spent by then. Decisions on materials, features and process fix later costs. LCC therefore pushes cost management upstream, to the design stage, where changes are cheap.

The link to target costing is direct. Target costing starts from a market price, subtracts the required profit, and gets the allowable cost. LCC supplies the full lifetime cost to compare with that allowable cost. If the lifetime cost is above target, you use value engineering or redesign to close the gap. Target costing sets the goal; LCC measures the whole cost against it.

LCC is not free of problems. Costs and volumes are estimated years ahead, so forecasts can be wrong. It needs data that ordinary systems do not collect. And a long horizon can ignore the time value of money unless you discount, which is why exam answers often use discounted LCC.

Key rules to remember

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.

How to solve Benefits, Limitations and Link to Target Costing questions

Use this order for any numerical or descriptive question on benefits, limitations and the target costing link.

  1. 1Read the question and identify whether it asks for discussion, comparison or a calculation.
  2. 2List the life cycle phases and note which costs belong to each phase.
  3. 3For a calculation, add all phase costs, discounting if a rate is given, to get total life cycle cost.
  4. 4Divide by lifetime units to get cost per unit, and compare with lifetime revenue or target price.
  5. 5If target costing is involved, compute target cost = price − profit, then find the cost gap.
  6. 6For a gap, suggest actions such as value engineering, design changes or supplier negotiation, focused on the design stage.
  7. 7State the recommendation clearly and mention one limitation, such as estimate uncertainty.

Quickest way: Phase-total and gap check

When to use it: Use when time is short and the question gives phase costs and a price or margin.

  1. Write the phases in one line and put each cost under it.
  2. Add them to get the total, then divide by lifetime units.
  3. Compute target cost = price − profit.
  4. Subtract to get the gap and write accept, redesign or reject.
  5. For theory, give three benefits, three limitations and one line on the target costing link.

Common mistakes in Benefits, Limitations and Link to Target Costing

  • Leaving out pre-production and after-sales costs.

    Students think only of manufacturing cost, as in traditional costing.

    Fix: Go through every phase and tick each one before totalling.

  • Dividing total life cycle cost by one year's units.

    Annual figures are familiar and tempting.

    Fix: Use total units over the whole life.

  • Saying LCC replaces traditional costing.

    Comparison questions are read as either/or.

    Fix: State that LCC adds a whole-life view to period reports, and that both are used.

  • Treating target costing and LCC as the same thing.

    Both stress design-stage cost control.

    Fix: Say target costing works backwards from price to allowable cost, while LCC measures total cost over the life.

  • Listing only advantages in a discuss question.

    Students recall benefits more easily.

    Fix: Give a balanced answer with limitations such as forecasting error and data demands, then conclude.

  • Ignoring time value in long-life projects.

    Costs are simply added when no rate is stated.

    Fix: If a discount rate is given, discount cash flows. If not, say undiscounted and note the limitation.

Worked examples

Example 1

Aarav Gadgets plans a product with a 4-year life. Design and development cost ₹12,00,000. Production cost is ₹300 per unit. Marketing and distribution cost is ₹3,00,000 in total. After-sales and warranty cost is ₹60 per unit. Disposal cost is ₹1,00,000. Total sales are 10,000 units at ₹550 per unit. Find the life cycle cost per unit and life cycle profit.

Show the solution
  1. Production cost = 10,000 × ₹300 = ₹30,00,000.
  2. After-sales cost = 10,000 × ₹60 = ₹6,00,000.
  3. Total life cycle cost = 12,00,000 + 30,00,000 + 3,00,000 + 6,00,000 + 1,00,000 = ₹52,00,000.
  4. Cost per unit = 52,00,000 ÷ 10,000 = ₹520.
  5. Revenue = 10,000 × ₹550 = ₹55,00,000.
  6. Life cycle profit = 55,00,000 − 52,00,000 = ₹3,00,000.

Answer: Life cycle cost per unit is ₹520 and life cycle profit is ₹3,00,000. Margin is thin at ₹30 per unit, so the estimates should be tested.

Example 2

Kaveri Appliances expects to sell a new mixer at a market price of ₹2,000. The required profit is 20% on selling price. Estimated life cycle cost per unit is ₹1,700. Find the cost gap and advise.

Show the solution
  1. Target profit = 20% × 2,000 = ₹400.
  2. Target cost = 2,000 − 400 = ₹1,600.
  3. Cost gap = 1,700 − 1,600 = ₹100 per unit.
  4. The estimate is above the allowable cost, so the product does not meet the target profit as designed.
  5. Since most lifetime cost is fixed at design, use value engineering on materials, features and the process, and review after-sales and disposal cost.

Answer: Target cost is ₹1,600 and the cost gap is ₹100 per unit. Do not launch as designed; redesign to remove ₹100 per unit of lifetime cost. At ₹1,700 the profit would be ₹300 per unit, which is 15% of price, below the 20% target.

Exam tips

  • For discuss questions, give a balanced answer: benefits, limitations, then a one-line conclusion.
  • For comparison questions, use clear points: time frame, costs covered, treatment of R&D, focus and use of information.
  • In numerical questions, show each phase cost separately so partial marks are secured.
  • When target costing appears, always compute the cost gap and name an action to close it.
  • In MCQs, remember that LCC emphasises design-stage cost commitment, not only production cost.

Practice questions from Product Life Cycle Costing

Benefits, Limitations and Link to 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.

Benefits, Limitations and Link to Target Costing: frequently asked questions

What are the main advantages of life cycle costing?

It shows the full cost of a product over its life, which improves pricing and profitability review. It highlights costs committed at design, so you can act early. It also supports better decisions on continuing, redesigning or withdrawing a product.

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

Traditional costing reports cost by period and mostly from production onward. LCC accumulates costs across the whole life, including design, after-sales and disposal. So LCC has a long-term, product-wise view, while traditional costing is period-based.

How are life cycle costing and target costing related?

Target costing sets an allowable cost from the market price and required profit. LCC gives the total lifetime cost to compare with it. Together they guide design and cost reduction before launch.

What are the limitations of life cycle costing?

It depends on forecasts of costs, volumes and life span, which may be wrong. It needs data that many systems do not capture. It can also be time-consuming and, if undiscounted, ignores the time value of money.