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CMA Final · Strategic Cost Management · Product Life Cycle Costing

A product's life cycle costing study at a Pune firm shows that 70% of the total life cycle cost of the product is committed (locked in) by the end of the design and development stage, although only 12% of the cost has actually been spent by then. Which conclusion best follows from this information?

Cost reduction efforts yield the most benefit at the design stage. Most of the life cycle cost is committed there even though little has been spent, so later stages offer little flexibility to change costs. Early design decisions therefore determine the bulk of the product's total cost.

  1. ACost reduction efforts yield the most benefit when focused on the design stageCorrect
  2. BCost reduction efforts yield the most benefit during the decline stage
  3. CCommitted cost and incurred cost are the same thing
  4. DProduction stage costs are fully controllable once the product is launched

Explanation

Because 70% of the cost is committed at design while only 12% has been spent, later stages have little flexibility. Hence the greatest scope for cost management lies in design. The decline-stage option is wrong as most costs are already locked in by then.

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