Page 279 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes 5. Development: When a product is first made it rarely meets the requirements of the
specification and changes have to be made. This method of testing and changing is
development.
6. Tooling: Tooling up for production can mean building a production line costing several
lakhs of rupees, building expensive jigs, buying special purpose machine tools or, in some
other say, making a very large investment.
7. Manufacture: The manufacture of a product involves the purchase of the raw materials,
the purchase of bought-out components, the use of labour to make and assemble the
product and the use of supervisory labour.
8. Selling: When the product is fit to sell and available, it may be necessary to spend money
on a campaign to sell the product.
9. Distribution: In the process of selling the product, it must be distributed to the sales
outlets and to the customers.
10. Product support: The manufacturer or supplier will have to make sure that spares and
expert servicing are available for the life of the product. The manufacturer or the supplier
may even have to offer free servicing and parts replacement during the early life of the
product.

11. Decommissioning or replacement: When a manufacturing product, comes to an end, the
plant used to build the product must be reused, sold, scrapped, or decommissioned in a
way that is acceptable to society.

14.7.3 Product Life Cycle Costing

The thrust of product life cycle costing is on the distribution of costs among categories changes
over the life of the product, as does the potential profitability of a product. Hence, it is important
to track and measure costs during each stage of a product’s life cycle.
Features of Product Life Cycle Costing: Product life cycle costing is important due to the following
features:
1. Product life cycle costing involves tracing of costs and revenues of each product over
several calendar periods throughout their entire life cycle. Costs and revenues can be
analysed by time periods, but the emphasis is on cost and revenue accumulation over the
entire life cycle for each product.
2. Product life cycle costing traces research and design and development costs, etc. incurred
to individual products over their life cycles, so that the total magnitude of these costs for
each individual product can be reported and compared with product revenues generated
in alter periods.
Benefits of Product Life Cycle Costing: The benefits of product life cycle costing are summarised
as follows:
1. The product life cycle costing results in earlier actions to generate revenue or to lower
costs than otherwise might be considered. There are a number of factors that need to the
managed in order to maximise return on a product.
2. Better decisions should follow from a more accurate and realistic assessment of revenues
and costs, at least within a particular life cycle stage.
3. Product life cycle thinking can promote long-term rewarding in contrast to short-term
profitability rewarding.

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