What is Life Cycle Costing?
Life cycle costing (LCC) is also known as cradle-to-grave costing. The purpose of this type of accounting is to provide a complete record of all the costs associated with the product or service. This type of costing is commonly found in manufacturing, product development, construction, and software companies.
In order to properly track life cycle costing, the accounting system must be configured or set up to manage this type of accounting in advance. In most accounting systems, there is a standard set of general ledger accounts that are used to track expenses and revenue. Life cycle costing requires the creation of additional, non-standard general ledger accounts. The purpose of these accounts is to group similar costs together for accurate reporting, while not inflating the financial statement reporting.
Many firms combine life cycle costing accounting with more standard cost accounting. In this method of accounting, cost centers and profile centers are used to track activity related to a specific product or category. For example, if a cosmetic company develops a new skin cream, they may create a cost center to track all the costs related to the original development in a unique cost center.
If the product is successful and moves from development to production, they may create another cost center to track activity at this stage of the process. Once the item is available for sale and distribution, they may use a different cost center to track that activity. This method has the benefit of tracking costs at the different stages, helping staff to focus on the current transactions.
In order to unify these different cost centers to provide a holistic view of the life cycle costs of the product, the company can use either cost center groups or sub-ledger accounts. Either method is fine, as long as it is applied consistently to the transactions. If the firm decides to change its methodology, an entire project may be required to translate prior transactions to the new system and ensure that all the values reconcile.
The accounting system is usually customized to provide a series of reports to track life cycle costing. These reports typically cover multi-year time periods, as the process to create a new product, bring it to market, and then retire it is quite long. Review the standard accounting reports that are provided with your accounting system and then develop the specifications of exactly what is required to meet your needs.
@JaneAir - That's very true. Sometimes I think it would be great if consumers could see how much it really costs to produce and item.
I feel like people complain about prices a lot, and sometimes it's justified. But other times, I feel like if people knew anything about business or manufacturing, they would understand a little bit about the pricing.
After all, most business aren't out to do community service. They need to make a profit!
I can see why companies do this. How could you get an accurate picture of your profits if you don't know how much it cost you to make something?
This knowledge could also guide business decisions. For example, if a product costs a lot to produce but doesn't generate very much profit a company could discontinue that. Or, if a product is cheap to make but generates a lot of profits, the company might choose to make more of it!
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