Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE. ISBN: 978-1-922069-70-2
Life Cycle Cost Management: An Environmental Approach
Sevgi Aydin1 and Ferhan Emir Tuncay2
The purpose of this study is to verify the importance of environmental
focusing in the life cycle cost (LCC) management. For this purpose, as the first
step, differences between traditional cost management and life cycle cost
management were determined. Then, cost life cycle and sales life cycle were
examined. These are two different aspects of product life cycle perspective and
they are used by life cycle cost management. The concept of life cycle was
examined from the perspectives of marketing, production and customers. The
relationship between these perspectives was determined. The issues of
generating profits and reducing the costs which are important in life cycle cost
management were mentioned, and life cycle valuation with respect to
environmental accounting was explained.
JEL Codes: M41
1. Introduction
Strategic cost management emphasizes the need for paying attention to and also for
executing external focusing and, at the same time, both internal and external connections. In
relation to this, life cycle cost management is an approach that forms conceptual framework to
ensure the execution of the board's internal and external connections. (Hansen and Mowen,
2006). In traditional cost systems, the costs of products or services are measured in short periods
like months or years. While life cycle cost management provides a long term perspective. That is
because life cycle cost management is interested in the whole life cycle of a product or a service.
Thus, it provides a larger perspective on the product/service cost and profitability.
Administrators are expected to handle not only the production costs but also the total costs
in a product's whole life cycle (Blocher et.al. 2005). Today, the intense international competition
and technological advances are increasing the importance of life cycle cost management for
corporations (Dunk, 2004). The differences between the traditional cost management and the life
cycle cost management are shown on Table 1 (Erden, 2004).
1
Ass.Prof.Dr. Sevgi AYDIN, Kadir Has University, Applied Science Faculty, Department of Accounting and Financial Management,
Turkey, Accounting Discipline, sevgi.aydın@khas.edu.tr.
2
Lecturer Dr. Ferhan EMİR TUNCAY, Kadir Has University, Applied Science Faculty, Department of Accounting and Financial
Management, Turkey, Accounting Discipline, ferhanemir.tuncay@khas.edu.tr.
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Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE. ISBN: 978-1-922069-70-2
Table1. The Comparison of Traditional Cost Management and Life Cycle Cost Management
Traditional Method
Life Cycle Costing Method
Consider the costs of product development Include
the
costs
of
product
and
logistic
support
as
period development and logistic support in the
expenditures.
product cost.
Takes only the costs related to production Takes all the costs related to product
into account in product costing.
into account in product costing.
Makes use of periodical reporting.
Makes use of life cycle costing.
The control of costs is important only The control of costs is important from
during the production level.
the beginning of the development level.
Life cycle costing approach is grounded on the basis of cost and profitability analysis. The
prominent feature of life cycle costing is that it is based on the expected lifetime of a product
which includes introduction as the strategic planning period, development, maturity, and decline.
The aim of this costing approach is to generate the highest amount of profit for the corporation
through the best marketing and production decisions in different levels of the product’s lifetime
(Erden, 2004). In this context, life cycle cost management appears as a method which increases
the efficiency during the decision making process.
The method of life cycle costing management provides opportunities to a company for the
execution of the long term planning which emphasizes the total life cycle costs. Through long
term planning, this method encourages corporations to increase the expenditures during the early
periods (design) of a product’s life cycle. Thus, it aims to choose the one with the most efficient
costing among alternative methods to reach the least long term cost (Yükçü, 2007).
Life cycle cost management uses the perspective of product life cycle. The two different
perspectives of product life cycle are the cost life cycle and the sales life cycle (Blocher et.,
2005).
In a simple definition, product life cycle is the time period from the conceiving stage to the
time when the product is withdrawn from the market. Product life cycle is generally covers the
whole range of a product whereas it may refer to specific brands and models. Furthermore, a
customer-based definition of product life cycles also becomes possible when the conceiving
stage and buying stage are swapped. These producer-based and customer based approaches
can be renewed by looking at the concepts of profit generation period and consumable period.
Profit generation period refers to the period when a product/service generates profit for the
company. A product’s profit generation period starts with its sale while the consumable period is
the time frame when the product/service serves the customer’s needs. Profit generation period is
in the producer’s sphere of interest whereas consumable period is in the customer’s sphere of
interest. However, as consumable period can be used as a means of competition, it is highly
important for the producer, too (Hansen and Mowen, 2006).
Cost life cycle is the sum of consecutive activities in a company which start with research
and development, and continue with design, production, marketing/distribution and consumer
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Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE. ISBN: 978-1-922069-70-2
services. This cycle is the product/service’s life cycle with respect to the costs. Cost life cycle is
shown on Figure 1 (Blocher et., 2005).
MARKETING
R&D
DESIGN
&
PRODUCTION
CUSTOMER
DISTRIBUTION
Pre-production Costs
SERVICES
After-Production Costs
Figure 1. Cost Life Cycle of a Product/Service
Sales life cycle is composed of consecutive stages which start with the product/service’s
introduction to the market and continue with the growth stage where the sales rise, the maturity
stage, and the decline stage, and finish with the product/service’s withdrawal from the market.
Sales life cycle is shown in Figure 2. Sales are low in the beginning of the life cycle, then reach
the peak in maturity stage, and then descend again. (Blocher et.al, 2005). Almost all the costs
and the environmental performance of the product are calculated during the design and
development stage (Chan et.al., 2014).
Sales
Growth
Intro.
Maturity
Decline
Time
Figure 2. Sales Life Cycle of the Product/Service
The subjects of important strategic cost management arise in all the stages of cost or sales
life cycles. The three instrumental methods in analyzing the cost life cycle are the target costing,
constraints theory, and life cycle costing. Target costing is used to determine the profitable
product designs during the early stages of cost life cycle. Constraints theory is a reformatory
method used to lower the production costs and to increase the production speed during the
middle stages of the cost life cycle. Life cycle costing is used during the whole period of the cost
life cycle to lower the total costs. In addition to these three methods, there is also strategic
pricing. Strategic pricing can be implemented if the corporation possesses many products in
different life cycle stages. In such conditions, strategic pricing is used in planning product
development activities and in determining the product’s price depending on the stage each
product in sales life cycle is (Blocher et.al, 2005).
These methods are generally used by the production companies where developing a new
product, the speed of production, and efficiency are important matters. Since the product has
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Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE. ISBN: 978-1-922069-70-2
physical characteristics, for production companies the implementation of these methods is easier.
However, it is also possible for service companies to use the aforesaid methods (Blocher et.al,
2005).
In order to understand the life cycle cost management better, it is necessary to examine
the key perspectives on product life cycle (Hansen and Mowen, 2006).
2. Life Cycle Perspectives
Companies maintain marketing perspective and production perspective while consumers
maintain customer perspective on product/service life cycle (Hansen and Mowen, 2006).
Marketing perspective defines the product/service’s forms of sale during the different
stages of its life cycle. Figure 3 shows a general course of the marketing perspective on product
life cycle. The stages described in Figure 3 are introduction, growth, maturity, and the end.
Introduction stage is the phase when the focus is on the introduction to the market. Preproduction and preparation activities refer to this stage. As seen on the chart, there are not any
sales for a certain period (pre-production period), then the sales start and rise slowly as the
product gets known. Growth stage is the time frame when sales rise in increasing rates. Maturity
stage is the period when the sales rise in decreasing rates. In this stage, the skew of the sales
curve becomes zero and it starts to fall in the decline stage (Hansen and Mowen, 2006).
Sales
Intro.
Growth
Maturity
Decline
Figure 3. The General Course of Product Life Cycle: The Marketing Perspective
Production perspective defines the stages of product life cycle with respect to the changes
in activities that take place during the life cycle. These activities are research and development
activities, production activities, and logistic activities. While marketing perspective is interested in
the profit from the sales, production perspective is interested in life cycle costs. Life cycle costs
are the costs that are related to the product in the whole life cycle. These costs are research
(related to the product) costs, development (planning, design, testing) costs, production (cycling
activities) costs, and logistic support (advertisement, distribution, warranty, customer services,
product services, etc.) costs. The curve of product life cycle costs is seen on Figure 4. Here, it is
significant to notice that more than 90 per cent of the assumed costs related to the product arise
in the development stage of the product life cycle. By assumed costs, costs that are included in
the product’s constitution are meant (Hansen and Mowen, 2006).
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Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE. ISBN: 978-1-922069-70-2
Life Cycle Costs (%)
100
75
25
Research Planning Design
Testing Production Logistic
Figure 4. Product Life Cycle: Production Perspective
Customer perspective is interested in the stages of consumption life cycle. The stages of
consumption life cycle are buying, using, sustaining, and disposing. Consumption life cycle
perspective is to concentrate on the performance of a product based on a certain price. Price is
the cost of obtaining the product and composed of buying cost, using cost, sustaining cost, and
disposing cost. That is to say, overall customer satisfaction is affected by both buying cost and
the costs after buying. Because of the reason that customer satisfaction is affected by afterbuying costs, producers pay close attention to managing the levels of these costs. The way
producers use the connection between after-buying activities and producers’ activities on behalf
of their interests is an important aspect of product life cycle management (Hansen and Mowen,
2006).
All three life cycle perspectives provide different ideas for the product/service producers.
Companies cannot ignore any of these three perspectives. An elaborative life cycle cost
management program has to consider the diversity of the existing perspectives. Life cycle cost
management is composed of activities that enable the designing, development, service, and
disposal of a product/service and thereby maximize the profit of the life cycle. In order to
maximize the life cycle profit, it is essential for producers to understand the relationships between
the three life cycle perspectives and to benefit from these relationships. Thus, it could be possible
for companies to multiply their incomes and to lower their costs (Hansen and Mowen, 2006).
Marketing perspective is interested in the product’s sales course structure during its life
cycle, and it is an income-centered perspective. Production perspective is interested in the
activities that are needed for developing, producing, marketing, and providing services for the
products. Production perspective stages support the sales targets the marketing stages. This
support requires resources consumption. For that reason, production life cycle can also be
defined as a spending-centered perspective.
Consumption life cycle is connected with product performance and price (including after
sales costs). Both the profit generation ability and resource consumption levels are related to
product performance and price. Companies should focus on what customers buy and what they
do not. Consumption life cycle can be defined as a consumer values-centered perspective. The
relationship explained here can vary according to the structure of the sector of activities (Hansen
and Mowen, 2006).
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Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE. ISBN: 978-1-922069-70-2
3. LCC for Generating Income and Reducing Costs
Income generation approaches are connected to the marketing life cycle stages and
customers. For example, pricing strategy changes in every stage. Higher prices can be set in the
introduction stage as customers have low price sensitivities and they are mostly interested in the
performance of the product. In the maturity stage, customers are highly sensitive both to the price
and to the performance. Strategies such as adding new qualities to the product, increasing the
durability, increasing the sustainability of product use, and provide customized products are
appropriate for this stage. In the maturity stage, differentiating is particularly important. However,
to ensure the increase of income, the customer must be eager to pay extra money for the
increase in the product performance. What is more, this difference that will be paid by the
customer has to be higher than the cost the producer has made to add a new quality to the
product. In the decline stage, income can be increased by finding new areas of usage or new
customers (Hansen and Mowen, 2006).
Life cycle cost management, is an essential element with respect to cost management
(Booth, 1994). Life cycle cost management’s main are of interest is not the control of costs but
cost reducing strategies. By using different cost reducing strategies and with the studies done in
the early stages of product life cycle, lower costs can be attained for later stages and
consumption stages. When you consider the fact that 90 per cent of a product’s life cycle costs
arise during the development stage, the importance of focusing on the management of costs
during the development stage is obvious. The biggest opportunities of reducing the costs arise
before the production starts. In order to lower the production, marketing, and after sale costs,
administrators should make more investments on pre-production activities and allocate more
resources for the activities in the early stages of the product’s life cycle (Hansen and Mowen,
2006).
The stages of product design and process design provide many opportunities for reducing
the costs. Some of them are: the design to lower production costs, the design to lower logistic
support cost, customer retention, and the design to lower the after-sale costs including
maintenance and disposal. For these approaches to be successful, company administrators have
to comprehend the interaction between the activities, cost keys (contractors) and between
activities well. Production, logistic, and after-buying activities are not unrelated to each other.
Some designs can lower the after-sale costs and increase the production costs. While other
designs can lower production, logistic, and after-buying costs at the same time (Hansen and
Mowen, 2006).
Traditional costing systems do not usually provide the necessary information generation
for life cycle cost management systems. Traditional costing systems focus on using unit-based
cost keys to define the costing behavior and are interested in production activities. In these
systems, logistic and after-buying activities are ignored, while research and development costs
with all other non-production costs are recognized as expenses as they appear. Traditional
costing systems do not handle all the product related costs that come up during the life cycle. In
fact, costing systems that are founded on generally accepted accounting principles do not
support the necessities of life cycle costing management. However, activity-based costing system
generates information on activities that include both pre-production and after-production activities
and on cost keys (Hansen and Mowen, 2006).
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Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE. ISBN: 978-1-922069-70-2
4. Life Cycle Assesment and Environmental Accounting
In 1990s, environmental accounting was mostly about environmental debates. Then a new
approach was developed in accounting literature. Hence, environmental accounting focused on
the accounting and management research problems (Bebbington and Larrinaga, 2014).
While environmental accounting is discussed as a cumulative process, there is another
matter of fact to consider: There are some restraining factors like profit making companies
(Conrtafatto and Burns).
Life cycle assesment from the viewpoint of environmental accounting is the evaluation of
the environmental effects of product, process, and activities during the whole life cycle (Gilpin,
2000). Life cycle analysis and life cycle assesment are parts of a system which evaluates all
environmental aspects of an activity from the acquisition of the raw material to the time all wastes
have turned back to the nature (Gale and Stokoe, 2001). Life cycle assesment aims to find out all
the interactions related to a product or a service (Gray and Bebbington, 2007).
Cost life cycle is companies’ activities that start with research and development and
continue with production, marketing, distribution, and customer services (Fava, 1991). This cycle
is the life cycle of the product/service with respect to the arising costs. Important strategic cost
management topics emerge in every stage of life cycle cost management. Life cycle cost
management is used in the assessment of the total costs in the whole cost life cycle. This method
is used by the companies where the product/service development, production/service speed, and
efficiency are important. Since the product has physical characteristics, for production companies
the implementation of these methods is easier. However, it is also possible for service companies
to use the aforesaid methods (Blocher et.al, 2005).
Life cycle assesment is a key approach related to companies’ interactions with the
environment. This technique is closely interested in primarily changing the administration’s
perspective and integrating the companies’ environmental effects to the management. It is
necessary to remind that the calculation of a company’s all environmental effects is impossible.
The aim of life cycle assesment is to calculate the interaction with the environment as much as
possible (Gray and Bebbington, 2007).
Life cycle assesment aims to meet the specific needs encountered during the
product/service development and improvement stages. It is possible to lower or eliminate these
costs by activities like monitoring the environmental costs in the sphere of life cycle assesment
and reconstructing the processes. In this context, it is essential for corporations to develop a life
cycle environmental costs system by evaluating the product/service’s environmental costs in
every life cycle stage. Through integrating the environmental costs to life cycle cost system, it is
possible to lower aforesaid costs in all the life cycle stages (Gray and Bebbington, 2007).
5. Conclusion
Today, managers are expected to consider not only the production cost but also the
product/service's costs that arise during the period from the concept stage until the end of the
lifetime and even after they become waste. This process, named as the life cycle cost
management, bears utmost importance with respect to environmental accounting activities.
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Proceedings of 11th International Business and Social Science Research Conference
8 - 9 January, 2015, Crowne Plaza Hotel, Dubai, UAE. ISBN: 978-1-922069-70-2
With respect to environmental accounting the life cycle assesment, which means the
evaluation of environmental effects of the processes and activities, aims to determine all of the
interactions related to a product/service. It is possible to lower or eliminate the environmental
costs by monitoring the environmental costs in the sphere of life cycle assesment and
reconstructing the processes. Corporations should develop a life cycle cost environmental cost
system on which they will follow their environmental costs in every stage of product/service
production.
Corporations should determine environmental policies and strategies in the transition to
environmental accounting practices. Then, especially with the support, leadership, and
participation of the senior management, they should develop the environmental accounting
system for the purposes of determining and reporting the environmental costs during the service
life cycle. Thus, it will be possible to lower, or even eliminate the damages on the environment
caused by the companies.
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