Atkinson, Solution Manual t/a Management Accounting, 6E
Chapter 8
Measuring Life-Cycle
Costs
QUESTIONS
The total-life-cycle costing approach is a comprehensive way
for managers to understand and manage costs through a
product’s design, development, manufacturing, marketing,
distribution, maintenance, service, and disposal stages. It refers
to the process of managing all costs along the value chain.
Using this approach can lead to substantial cost savings. By
some estimates, 80-85% of a product’s total life costs are
committed by decisions made in the RD&E stage, underscoring
the importance of managing all costs along the value chain.
The three major stages of the total-life-cycle costing approach
are (1) research, development and engineering (RD&E), (2)
manufacturing, and (3) post-sale service and disposal.
Committed costs are those that the organization agrees must
be set aside (or committed) to cover product costs through the
three major stages of the life cycle. Costs incurred are the
actual costs that the organization has paid out over the three
major stages of the product life cycle.
The three substages of the RD&E stage are (1) using market
research to assess emerging customer needs that lead to idea
generation for new products, (2) product design, during which
scientists and engineers develop the technical aspects of the
product, and (3) product development, during which the
company creates the features critical to customer satisfaction
and designs prototypes, production processes, and any special
tooling required.
During the post-sale service and disposal stage, organizations
– 272 –
, Chapter 8: Measuring Life-Cycle Costs
have to consider both the costs involved in providing service to
products as soon as they are in the hands of customers, as well
as the costs of ultimately disposing of the product. The
following three substages typically occur during this stage: (1)
rapid growth from the first time the product is shipped
– 273 –
,Atkinson, Solution Manual t/a Management Accounting, 6E
through the growth stage of its sales, (2) transition from the peak of sales to
the peak in the service cycle, and (3) maturity from the peak in the service
cycle to the time of the last shipment made to a customer; disposal occurs at
the end of a product’s life and lasts until the customer retires the final unit
of a product.
Target costing is a method of profit planning and cost reduction that focuses
on reducing costs for products in the research, development and engineering
(RD&E) stage of the total life cycle of a product. It also considers all
aspects of the value chain and explicitly recognizes total-life-cycle costs.
The two essential financial elements needed to arrive at a target cost are the
target selling price and the target profit margin. The target cost is the
difference between the two.
For product development and target costing purposes, customers’ needs or
requirements must be translated into product functions or components for
engineering. A quality function deployment matrix relates information about
customer requirements (that is, features that customers require) to a
product’s functions or components. The matrix may also include a
competitive evaluation of the product. In this way, the matrix highlights the
relationship among competitive offerings, customer requirements, and a
product’s design parameters. The matrix is used to compute functional
(component) rankings of how important each component is to customers,
and these rankings are in turn used to compute a value index (benefit/cost
ratio) for each component. If the value index is less than one, the cost
exceeds the benefit, and the component is a likely candidate for cost
reduction in efforts to achieve the target cost.
Value engineering is a process in which each component of a product is
scrutinized to determine whether it is possible to reduce costs while
maintaining functionality and performance. Stated another way, value
engineering is an organized effort directed at analyzing the functions of the
various components for the purpose of achieving these functions at the
lowest overall cost without reductions in required performance, reliability,
maintainability, quality, safety, recyclability, and usability.
Target costing is most applicable during the research, development and
engineering (RD&E) stage of the total life cycle of a product.
Cross-functional teams guide the target costing process. These teams may
include, for example, representatives from the organization’s design
– 274 –
, Chapter 8: Measuring Life-Cycle Costs
engineering, manufacturing, management accounting, and marketing areas,
as well as representatives from among suppliers, customers, distributors,
and waste disposers. Supply chain management, which involves
developing cooperative, mutually beneficial long-term relations between
buyers and suppliers, plays a critical role in target costing when suppliers
actively participate in resolving cost reduction problems.
The break-even time (BET) metric for the product development
process measures the length of time from the project’s
beginning until the product has been introduced and generated
enough profit to pay back the investment originally made in its
development.
The break-even time (BET) metric brings together in a single
measure three critical elements in an effective and efficient
product development process. First, for the company to break-
even on its R&D process, its investment in the product
development process must be recovered. So BET requires
tracking the entire cost of the design and development process.
It provides incentives to make the product development process
faster and less costly. Second, BET stresses profitability. It
encourages marketing managers, manufacturing personnel, and
design engineers to work together to develop a product that
meets real customer needs, including offering the product
through an effective sales channel at an attractive price, and at a
manufacturing cost that enables the company to earn profits that
can repay the product development investment cost. And third,
BET is denominated in time: it encourages the launch of new
products faster than the competition so that higher sales can be
earned sooner to repay the product development investment.
Desirable behavioral consequences that are likely as people
focus on improving the break-even time (BET) metric include
collaboration and integration across organizational functions.
People from different disciplines come together at the start of
every product development project to estimate the time and
money they require to perform their tasks, and the impact of
their efforts on the success of the entire project. The BET
metric promotes discussion and facilitates decision-making
during the project among people from the multiple functions as
more information about the project, customers, and competitors
becomes available.
– 275 –
Chapter 8
Measuring Life-Cycle
Costs
QUESTIONS
The total-life-cycle costing approach is a comprehensive way
for managers to understand and manage costs through a
product’s design, development, manufacturing, marketing,
distribution, maintenance, service, and disposal stages. It refers
to the process of managing all costs along the value chain.
Using this approach can lead to substantial cost savings. By
some estimates, 80-85% of a product’s total life costs are
committed by decisions made in the RD&E stage, underscoring
the importance of managing all costs along the value chain.
The three major stages of the total-life-cycle costing approach
are (1) research, development and engineering (RD&E), (2)
manufacturing, and (3) post-sale service and disposal.
Committed costs are those that the organization agrees must
be set aside (or committed) to cover product costs through the
three major stages of the life cycle. Costs incurred are the
actual costs that the organization has paid out over the three
major stages of the product life cycle.
The three substages of the RD&E stage are (1) using market
research to assess emerging customer needs that lead to idea
generation for new products, (2) product design, during which
scientists and engineers develop the technical aspects of the
product, and (3) product development, during which the
company creates the features critical to customer satisfaction
and designs prototypes, production processes, and any special
tooling required.
During the post-sale service and disposal stage, organizations
– 272 –
, Chapter 8: Measuring Life-Cycle Costs
have to consider both the costs involved in providing service to
products as soon as they are in the hands of customers, as well
as the costs of ultimately disposing of the product. The
following three substages typically occur during this stage: (1)
rapid growth from the first time the product is shipped
– 273 –
,Atkinson, Solution Manual t/a Management Accounting, 6E
through the growth stage of its sales, (2) transition from the peak of sales to
the peak in the service cycle, and (3) maturity from the peak in the service
cycle to the time of the last shipment made to a customer; disposal occurs at
the end of a product’s life and lasts until the customer retires the final unit
of a product.
Target costing is a method of profit planning and cost reduction that focuses
on reducing costs for products in the research, development and engineering
(RD&E) stage of the total life cycle of a product. It also considers all
aspects of the value chain and explicitly recognizes total-life-cycle costs.
The two essential financial elements needed to arrive at a target cost are the
target selling price and the target profit margin. The target cost is the
difference between the two.
For product development and target costing purposes, customers’ needs or
requirements must be translated into product functions or components for
engineering. A quality function deployment matrix relates information about
customer requirements (that is, features that customers require) to a
product’s functions or components. The matrix may also include a
competitive evaluation of the product. In this way, the matrix highlights the
relationship among competitive offerings, customer requirements, and a
product’s design parameters. The matrix is used to compute functional
(component) rankings of how important each component is to customers,
and these rankings are in turn used to compute a value index (benefit/cost
ratio) for each component. If the value index is less than one, the cost
exceeds the benefit, and the component is a likely candidate for cost
reduction in efforts to achieve the target cost.
Value engineering is a process in which each component of a product is
scrutinized to determine whether it is possible to reduce costs while
maintaining functionality and performance. Stated another way, value
engineering is an organized effort directed at analyzing the functions of the
various components for the purpose of achieving these functions at the
lowest overall cost without reductions in required performance, reliability,
maintainability, quality, safety, recyclability, and usability.
Target costing is most applicable during the research, development and
engineering (RD&E) stage of the total life cycle of a product.
Cross-functional teams guide the target costing process. These teams may
include, for example, representatives from the organization’s design
– 274 –
, Chapter 8: Measuring Life-Cycle Costs
engineering, manufacturing, management accounting, and marketing areas,
as well as representatives from among suppliers, customers, distributors,
and waste disposers. Supply chain management, which involves
developing cooperative, mutually beneficial long-term relations between
buyers and suppliers, plays a critical role in target costing when suppliers
actively participate in resolving cost reduction problems.
The break-even time (BET) metric for the product development
process measures the length of time from the project’s
beginning until the product has been introduced and generated
enough profit to pay back the investment originally made in its
development.
The break-even time (BET) metric brings together in a single
measure three critical elements in an effective and efficient
product development process. First, for the company to break-
even on its R&D process, its investment in the product
development process must be recovered. So BET requires
tracking the entire cost of the design and development process.
It provides incentives to make the product development process
faster and less costly. Second, BET stresses profitability. It
encourages marketing managers, manufacturing personnel, and
design engineers to work together to develop a product that
meets real customer needs, including offering the product
through an effective sales channel at an attractive price, and at a
manufacturing cost that enables the company to earn profits that
can repay the product development investment cost. And third,
BET is denominated in time: it encourages the launch of new
products faster than the competition so that higher sales can be
earned sooner to repay the product development investment.
Desirable behavioral consequences that are likely as people
focus on improving the break-even time (BET) metric include
collaboration and integration across organizational functions.
People from different disciplines come together at the start of
every product development project to estimate the time and
money they require to perform their tasks, and the impact of
their efforts on the success of the entire project. The BET
metric promotes discussion and facilitates decision-making
during the project among people from the multiple functions as
more information about the project, customers, and competitors
becomes available.
– 275 –
