Businesswoman talking on a cell phone
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 life cycle cost, 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 general ledger accounts that are used to track expenses and income. Life cycle 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 reporting inflated financial statements.
Many companies combine life cycle cost accounting with more standard cost accounting. In this method of accounting, 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 in a single cost center.
If the product is successful and moves from development to production, they can create another cost center to track the 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 this activity. This method has the advantage of tracking costs at different stages, which helps the team focus on current transactions.
To unify these different cost centers to provide a holistic view of product life cycle 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 to the new system and ensure that all values are reconciled.
The accounting system is usually customized to provide a series of reports to track the life cycle cost. These reports generally cover periods of several years, since the process of creating a new product, bringing it to market, and then withdrawing it is quite a long one. Review the standard accounting reports provided with your accounting system and develop specifications for exactly what is needed to meet your needs.