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CMA Final · Strategic Cost Management · Product Life Cycle Costing

A product has total life cycle costs of Rs 120 lakh over 4 years, of which Rs 30 lakh is incurred before launch. Design decisions made in the pre-launch phase lock in 75% of the total life cycle costs. What amount of cost is committed (locked in) by the end of design, and what portion of it has actually been spent?

Committed cost is Rs 90 lakh, being 75 percent of Rs 120 lakh, while only Rs 30 lakh has actually been spent by the end of design. Life cycle costing stresses that most costs are locked in early even though they are incurred later.

  1. ACommitted Rs 90 lakh; spent Rs 30 lakhCorrect
  2. BCommitted Rs 30 lakh; spent Rs 90 lakh
  3. CCommitted Rs 90 lakh; spent Rs 90 lakh
  4. DCommitted Rs 120 lakh; spent Rs 30 lakh

Explanation

Committed cost = 75% x 120 = Rs 90 lakh. Only the pre-launch Rs 30 lakh has been actually incurred. The option stating spending of Rs 90 lakh confuses commitment with cash outlay.

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