Life Cycle Cost (LCC) accounting tracks all costs associated with a product or service from development to retirement. It requires the creation of additional general ledger accounts and can be combined with standard cost accounting. Cost centers and subledger accounts can be used to track costs at different stages, and customized reports are necessary to track multi-year time periods.
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.
In order to properly track lifecycle costs, the accounting system must be configured or set up to handle 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. The life-cycle costing calculation requires the creation of additional non-standard general ledger accounts. The purpose of these accounts is to group similar costs for accurate reporting, without inflating budget reporting.
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, they might create a cost center to track all costs related to the original development in a single cost center.
If the product is successful and moves from development to production, it could create another cost center to track activity at this 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 advantage of tracking costs at different stages, helping staff focus on current transactions.
In order to unify these different cost centers to provide a holistic view of product lifecycle costs, the company can use cost center groups or subledger accounts. Both methods are fine, as long as they are applied consistently to transactions. If the firm decides to change its methodology, it may take an entire project to translate previous transactions into the new system and ensure that all values reconcile.
The accounting system is usually customized to provide a set of reports to track life cycle costs. These reports typically cover multi-year time periods, as the process of creating a new product, bringing it to market, and then retiring it is quite lengthy. Review the standard accounting reports that come with your accounting system, then develop specifics of what’s needed to meet your needs.
Protect your devices with Threat Protection by NordVPN
