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ACCA Strategic Professional · Strategic Business Leader · Cost and management accounting

Brightway Telecom is launching a network product with heavy research, design and development spending, a short selling period and significant decommissioning costs. A manager notes that 80% of a product's life-cycle costs are typically committed during design, yet most are not incurred until later. What does this imply for the company's use of life cycle costing?

Cost management should focus on the design stage, where most life-cycle costs are committed, and the appraisal should include pre-production and end-of-life costs such as decommissioning. Waiting until maturity would be too late to influence costs that have already been locked in.

  1. ACost management effort should be concentrated at the design stage, where most costs are determined, and pre- and post-production costs should be included in the appraisalCorrect
  2. BOnly manufacturing costs should be assessed because other costs are not controllable
  3. CCosts should be reviewed only once the product reaches the maturity stage when volumes are stable
  4. DLife cycle costing is relevant only to the financial accounts for capitalising development costs

Explanation

Life cycle costing considers all costs from design to disposal. Because most costs are committed early, even though incurred later, managers gain the greatest leverage by acting at design. Waiting until maturity forgoes this influence, and the technique is a management accounting tool, not just a financial reporting one.

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