Accounting for Managers: Interpreting accounting information for decision-making

OPERATING DECISIONS 133

Table 9.8 Relevant cost of materials

Material Relevant cost

A 750 @ £6 (replacement price) 4,500
B 1,000 @ £5 (replacement price) 5,000
C 400 @ £2.50 (opportunity cost of scrap value) 1,000
100 @ £4 (replacement price) 400
D 300 @ £6 (opportunity cost of scrap value) 1,800
or
300 @ £8 (substitute for material E) 2,400
Total relevant material cost 13,300
Proceeds of sale 16,000
Incremental gain 2,700

Other costing approaches.................................

Lifecycle costing

All products and services go through a typical lifecycle, from introduction, through
growth and maturity to decline. The lifecycle is represented in Figure 9.3.
Over time, sales volume increases, then plateaus and eventually declines.
Management accounting has traditionally focused on the period after product
design and development, when the product/service is in production for sale to
customers. However, the product design phase involves substantial costs that
may not be taken into account in product/service costing. These costs may have
been capitalized (see Chapters 3 and 6) or treated as an expense in earlier years.
Similarly, when products/services are discontinued, the costs of discontinuance
are rarely identified as part of the product/service cost.
Lifecycle costingestimates and accumulates the costs of a product/service
over its entire lifecycle, from inception to abandonment. This helps to deter-
mine whether the profits generated during the production phase cover all the
lifecycle costs. This information helps managers make decisions about future
product/service development and the need for cost control during the develop-
ment phase.

Sales

volume

Introduction Growth Maturity Decline

Figure 9.3 Typical product/service lifecycle