Life cycle cost (LCC) accounting tracks all costs associated with a product or service from creation to disposal. It requires customized ledger accounts and can be combined with standard cost accounting. Reports cover several years and can be customized to meet specific needs.
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 cost is commonly found in manufacturing, product development, construction, and software companies.
To properly track lifecycle costing, the accounting system must be set up or configured to manage this type of accounting in advance. In most accounting systems, there is a standard set of ledger accounts 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 to generate accurate reports without inflating financial statement reports.
Many companies combine lifecycle 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 could create a cost center to track all costs related to the original development to a single cost center.
If the product is successful and moves from development to production, they can create another cost center to track activity at that stage of the process. Once the item is available for sale and distribution, they can use a different cost center to track that activity. This method has the benefit 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 ledger accounts. Either method is fine as long as it is consistently applied to transactions. If the company decides to change its methodology, it may take an entire project to convert past transactions into the new system and ensure that all values reconcile.
The accounting system is usually customized to provide a series of reports to track life cycle cost. These reports typically cover periods of several years, such as the process of creating a new product, bringing it to market, and then retiring for a long time. Review the standard accounting reports provided with your accounting system and develop specifications of exactly what is needed to meet your needs.
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