Page 278 - DCOM206_COST_ACCOUNTING_II

Unit 14: Emerging Concepts in Cost Management

expenditure, sale level, revenue and profit over the period from new idea generation to the Notes
deletion of product from product range.
Phases of Product Life Cycle: The life cycle of a product consists of four phase viz. Introduction,
Growth, Maturity and Decline.
During introductory phase, a product is launched into the market, its customers are innovators.
Competition is almost negligible and profits are non-existent. Under growth phase, sales and
profits rise, at a rapid pace. Competitors enter the market often in large numbers. As a result of
competition, profits starts declining near the end of the growth phase.
During the phase of maturity sales continue to increase, but at a decreasing rate. When sales
level off, profits of both producers and middlemen decline. The main reason is intense price
competition; some firms extend their product lines with new models.
Decline in sales volume characterises the last phase of the product life cycle. The need or demand
of the product disappears. Availability of better and less costly substitutes in the market accounts
for the arrival of this phase.
Characteristics of Product Life Cycle: The major characteristics of product life-cycle concept are
as follows:
1. The products have finite lives and pass through the cycle of development, introduction,
growth, maturity, decline and deletion at varying speeds.
2. Product cost, revenue and profit patterns tend to follow predictable courses through the
product life cycle. Profits first appear during the growth phase and after stabilising during
the maturity phase, decline thereafter to the point of deletion.
3. Profit per unit varies as products move through their life cycles.
4. Each phase of product life cycle poses different threats and opportunities that give rise to
different strategic actions.
5. Products require different functional emphasis in each phase such as an R&D emphasis in
the development phase and cost control emphasis in the decline phase.
6. Finding new uses or new users or getting the present uses to increase their consumption,
this may extend the life of the product.

14.7.2 Various Stages of Product Life Cycle

Typically the life cycle of a manufactured product will consist of the following stages:

1. Market research: This usually means that market research will establish what product the
customer wants, how much he is prepared to pay for it and how many he will buy.
2. Specification: When market research has established what is to be made, the design
specification will give such details as required life, maximum permissible maintenance
costs, maximum permissible manufacturing cost, the number required, the delivery date,
the required performance of the product.
3. Design: With a precise specification, the designers can produce the drawings and process
schedules which define the geometry of the product and some of the manufacturing
processes.
4. Prototype manufacture: From the drawings it will possible to manufacture a small number
of the product. These prototypes will be used to develop the product and eventually to
demonstrate that it meets the requirements of the specification.

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