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1. External financial reporting decisions
2. Planning, budgeting, and forecasting
3. Performance management
4. Cost management
4.1 Measurement concepts
4.2 Costing systems
4.2.1 Job order costing
4.2.2 Activity-based costing (ABC)
4.2.3 Life-cycle costing
4.2.4 Process costing systems
4.3 Overhead costs
4.4 Supply chain management
4.5 Business process improvement
5. Internal control
6. Technology and analytics
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4.2.3 Life-cycle costing
Achievable CMA Part 1
4. Cost management
4.2. Costing systems
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Life-cycle costing

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Learning outcome statements

The learning outcome statements relevant for this section are:

  1. demonstrate an understanding of the concept of life-cycle costing and the strategic value of including upstream costs, manufacturing costs, and downstream costs

Life-cycle costing

Life-cycle costing (LCC) is a costing approach that captures all costs associated with a product over its entire life cycle, from the earliest stages of conception and design, through production and use, to disposal or retirement. The goal is to provide a comprehensive view of the total cost of ownership and operation of a product, not just its manufacturing or acquisition costs.

Of five product life cycle stages: design, production, marketing, after sales, disposal.
Product Life Cycle


This approach is particularly useful in long-term planning, pricing, and investment decisions, where future costs (e.g., maintenance, service, disposal) are material.

Life-cycle costing divides the product life into three broad phases:

Phase Typical costs included
Upstream costs Research and development (R&D), design, prototyping, market research, product testing
Manufacturing costs Direct materials, direct labor, overhead, quality assurance, rework, production line setup
Downstream costs Marketing, distribution, after-sales service, warranty, customer support, product disposal

Unlike traditional cost systems that focus primarily on production, LCC provides a more complete cost picture, especially important when post-sale costs (like warranties or repairs) are significant.

Strategic value of life-cycle costing

Life-cycle costing helps managers understand cost behavior over time and make better long-term decisions. Key strategic benefits include:

  • Incorporating total cost exposure allows for more accurate and profitable pricing strategies.
  • Early design decisions often determine 70–80% of a product’s life-cycle cost. LCC encourages selecting materials and features that reduce long-term costs, not just initial costs.
  • Choosing suppliers or solutions based on total life-cycle cost, not just upfront purchase price, improves value.
  • Reducing downstream costs such as warranty claims and service issues can improve product reliability and brand trust.
  • LCC supports green initiatives by considering environmental costs, end-of-life recycling, and waste management.

Example: Total costs across the product life cycle

Cost Category Description Amount
R&D and Design Engineering, product testing $40,000
Manufacturing Direct materials, labor, overhead $100,000
Marketing & Distribution Packaging, promotions, logistics $20,000
After-Sales Support Warranty, repair, call center $10,000
Total Life-Cycle Cost $170,000

Using life-cycle costing, management sees that post-manufacturing costs account for ~18% of total cost, costs that might be overlooked in traditional systems.

Life-cycle costing (LCC)

  • Captures all costs over a product’s entire life cycle
  • Includes upstream, manufacturing, and downstream costs
  • Provides total cost of ownership, not just acquisition or production

Phases and typical costs

  • Upstream costs: R&D, design, prototyping, market research, product testing
  • Manufacturing costs: direct materials, direct labor, overhead, quality assurance, rework, setup
  • Downstream costs: marketing, distribution, after-sales service, warranty, customer support, disposal

Strategic value of life-cycle costing

  • Enables accurate, profitable pricing by considering total cost exposure
  • Early design choices impact 70–80% of total life-cycle cost
  • Supports supplier selection and solutions based on total cost, not just price
  • Reduces downstream costs, improving reliability and brand trust
  • Encourages consideration of environmental and end-of-life costs

Key insights from LCC example

  • Post-manufacturing (downstream) costs can be significant (e.g., ~18% of total)
  • Traditional costing may overlook important downstream and upstream costs

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Next  | 4.2.4 Process costing systems
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Life-cycle costing

Learning outcome statements

The learning outcome statements relevant for this section are:

  1. demonstrate an understanding of the concept of life-cycle costing and the strategic value of including upstream costs, manufacturing costs, and downstream costs

Life-cycle costing

Life-cycle costing (LCC) is a costing approach that captures all costs associated with a product over its entire life cycle, from the earliest stages of conception and design, through production and use, to disposal or retirement. The goal is to provide a comprehensive view of the total cost of ownership and operation of a product, not just its manufacturing or acquisition costs.


This approach is particularly useful in long-term planning, pricing, and investment decisions, where future costs (e.g., maintenance, service, disposal) are material.

Life-cycle costing divides the product life into three broad phases:

Phase Typical costs included
Upstream costs Research and development (R&D), design, prototyping, market research, product testing
Manufacturing costs Direct materials, direct labor, overhead, quality assurance, rework, production line setup
Downstream costs Marketing, distribution, after-sales service, warranty, customer support, product disposal

Unlike traditional cost systems that focus primarily on production, LCC provides a more complete cost picture, especially important when post-sale costs (like warranties or repairs) are significant.

Strategic value of life-cycle costing

Life-cycle costing helps managers understand cost behavior over time and make better long-term decisions. Key strategic benefits include:

  • Incorporating total cost exposure allows for more accurate and profitable pricing strategies.
  • Early design decisions often determine 70–80% of a product’s life-cycle cost. LCC encourages selecting materials and features that reduce long-term costs, not just initial costs.
  • Choosing suppliers or solutions based on total life-cycle cost, not just upfront purchase price, improves value.
  • Reducing downstream costs such as warranty claims and service issues can improve product reliability and brand trust.
  • LCC supports green initiatives by considering environmental costs, end-of-life recycling, and waste management.

Example: Total costs across the product life cycle

Cost Category Description Amount
R&D and Design Engineering, product testing $40,000
Manufacturing Direct materials, labor, overhead $100,000
Marketing & Distribution Packaging, promotions, logistics $20,000
After-Sales Support Warranty, repair, call center $10,000
Total Life-Cycle Cost $170,000

Using life-cycle costing, management sees that post-manufacturing costs account for ~18% of total cost, costs that might be overlooked in traditional systems.

Key points

Life-cycle costing (LCC)

  • Captures all costs over a product’s entire life cycle
  • Includes upstream, manufacturing, and downstream costs
  • Provides total cost of ownership, not just acquisition or production

Phases and typical costs

  • Upstream costs: R&D, design, prototyping, market research, product testing
  • Manufacturing costs: direct materials, direct labor, overhead, quality assurance, rework, setup
  • Downstream costs: marketing, distribution, after-sales service, warranty, customer support, disposal

Strategic value of life-cycle costing

  • Enables accurate, profitable pricing by considering total cost exposure
  • Early design choices impact 70–80% of total life-cycle cost
  • Supports supplier selection and solutions based on total cost, not just price
  • Reduces downstream costs, improving reliability and brand trust
  • Encourages consideration of environmental and end-of-life costs

Key insights from LCC example

  • Post-manufacturing (downstream) costs can be significant (e.g., ~18% of total)
  • Traditional costing may overlook important downstream and upstream costs

More from Costing systems

  • Process costing systems