Life cycle cost

The life cycle costs are all those costs associated with the various stages of a product’s life cycle. The life cycle cost is the sum of all recurring and one-time (non-recurring) costs over the full life span or a specified period of a good, service, structure, or system. The lifecycle cost includes purchase price, installation cost, operating costs, maintenance and upgrade costs, and remaining (residual or salvage) value at the end of ownership or its useful life.

A product lifecycle has 4 stages. The first stage is the introduction stage. Under this stage the sales will be low and the customers will become aware of the product. The main goal of this stage is to establish a market and build primary demand for the product class. The advertising costs are high under this stage. The second stage is the growth phase. Under this stage there will be a rapid growth in the revenue. Sales will be increase as the customers are knowledge on the availability of the product and additional market segments are targeted. The third stage is the maturity stage. Under this stage the company is most profitable. The sales increase but at a lower pace. Competition may reduce the market share. The main goal is to maintain the market share and extend the product life cycle. The last stage is the decline stage. Under this stage the market becomes saturated and the product becomes obsolete.

The life cycle cost includes the total cost of ownership of machinery and equipment, including its cost of acquisition, operation, maintenance and conversion. The cost of a product includes the cost of development and design, introduction, production, distribution, post sales service, product take back and abandonment. It is also known as the cradle-to-grave costing. These cost centers and profile centers are used to track activity related to a specific product or category. The life cycle cost method has the benefit of tracking costs at the different stages which helps the personnel to focus on the current transactions.

Questions

• What is life cycle cost?
• What are the stages in a product lifecycle?