What is life cycle cost?

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Life cycle cost (LCC) is also known as cradle-to-grave cost. The purpose of this type of accounting is to provide a complete record of all costs associated with the product or service. This type of costing is commonly found in manufacturing, product development, construction, and software companies.

To properly control lifecycle costing, the accounting system must be configured or configured to manage this type of accounting in advance. In most accounting systems, there is a standard set of general ledger accounts that are used to track expenses and income. Lifecycle costing requires the creation of additional non-standard ledger accounts. The purpose of these accounts is to group similar costs together for accurate reporting, without bloating financial statement reports.

Many companies combine life cycle cost accounting with more standard cost accounting. In this accounting method, cost centers and profile centers are used to track activities related to a specific product or category. For example, if a cosmetics company develops a new skin cream, it can create a cost center to track all costs related to the original development to a unique cost center.

If the product is successful and moves from development to production, they can create another cost center to track activity at this stage in the process. Once the item is available for sale and distribution, they can use a different cost center to track this activity. This method has the advantage of tracking costs at different stages, helping the team to focus on current transactions.

To unify these different cost centers to provide a holistic view of product lifecycle costs, the company can use cost center groups or subsidiary accounts. Either method is suitable as long as it is applied consistently to transactions. If the company decides to change its methodology, an entire project may be required to translate past transactions into the new system and ensure that all values ​​reconcile.

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The accounting system is usually customized to provide a series of reports to track the lifecycle cost. These reports usually cover periods of several years, as the process to create a new product, bring it to market, and then retire it is quite lengthy. Review the standard accounting reports provided with your accounting system and develop specifications for exactly what is needed to meet your needs.

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