Improving Profitability with Life Cycle Costing

Budgeting traditionally does not take into account the life cycle of an entity; therefore, resources are not allocated efficiently. By properly implementing product life cycle analysis with planning, control, and motivation, the budgetary process can be improved.

PRODUCTION LIFE CYCLE DIAGRAM
PLC STAGE	SALES	EXPENSES	OTHER INDICATORS/ ACTIVITIES	ORGANIZATIONAL CHARACTERISTICS
START-UP	Low or non-existent	High research, product development, capital expenditures. High PPE to meet projected demand.	Shortage of cash Low ROA Low earnings Low working capital High inv. Turnover High debt.	Entrepreneurial Management Style – Emphasis on market research and product development.
GROWTH	Rising sales	Increase promotional and production costs. Increase in IT and administrative costs. Increased purchases of production assets	Marketable product Low cash flow Increase in earnings	Management style – Formal system of marketing, production, and accounting.
MATURITY	Stable	Costs of searching for increased efficiencies Increased Administrative costs Most costs are stable	Historical data can be used to predict future. Standards developed for budgeting. Large Net Income Investment in product peaks	Administrative Style – Emphasis on monitoring existing systems.
HARVEST	Some decline	Reduced personnel and advertising costs. No new investments.	High ROA Low earnings. Some increased revenue from equipment sales.	Realistic Style – Must face fact that winding down is needed. Purchases and production must be tied to sales.

	MAIN FUNCTIONS OF A BUDGET
PLC STAGE	PLANNING	CONTROL	MOTIVATION
STARTUP	Low priority because the main concern is producing and selling product.	Low priority because controls could impede creative process.	Low priority because employees haven’t yet seen results. Employees need self- motivation.
GROWTH	Increased priority due to increase in productive capacity and employees.	More resources increase need for control, but priority is still relatively low.	Increase in sales and routine job descriptions increase the importance of motivation from budgets.
MATURITY	Even more priority due to price competition.	Increased competition requires highest quality and lowest cost. Control is essential.	Even more need for motivation. Employees forced to follow standards and see only a small piece of the whole process.
HARVEST	Somewhat important. Must plan when and how to drop products.	Decreased priority because of less competition. Timing is still important.	Motivation is essential. Employees see phase-out of product and possibly themselves.

Maaw Home	Contents	Bibliography	Maaw's Book	Books	Journals	Summaries	Marketplace	Software	Gadgets
Introduction	Main Topics	Search maaw	Grad Course	Textbooks	Journal Bibs	Links	Maaw's Blog	Videos	Contribute