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    Life Cycle

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    SAC currently uses a basic standard cost system. Management knows very little about other concepts of costing and the benefits of having multiple costing methods.

    Write a paper on Life Cycle Cost to include the following:
    the definition of the concept
    how and when the concept could be used by SAC
    how the application of the concept differs from the other concepts
    its advantages and disadvantages

    The Sparklin Automotive Company (SAC) has been in business since 1930. It began business in the United States supplying spark plugs to automotive manufacturers (OEM, the original equipment market) and the automotive aftermarket.
    SAC has introduced a new spark plug manufacturing process in the United States that produces a higher quality spark plug guaranteed to last 100,000 miles. The introduction of this spark plug has been very successful in the United States.
    In addition to these types of projects, your responsibilities include creating and analyzing the monthly performance of each plant and consolidating the results into a set of financial statements footnoted with explanations.

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    Solution Preview

    Lifecycle costing means assessment of the costs of a good or service throughout its life cycle. This is an accounting method of costing where costs are allocated over the life of the product. The total financial cost of buying, operating and maintaining a machinery is a good example of Lifecycle costing. This is a costing technique that focuses on all costs along the value that will be incurred throughout the life of a product. Another way to look at Lifecycle costing is that it indicates cradle to grave costs used for evaluating alternatives for machinery, projects and buildings. This means that Lifecycle cost includes the total cost of ownership of machinery and equipment, the cost of acquisition, operation, maintenance, conversion and dismantling. In other words Lifecycle costing adds up the costs that are incurred from the beginning to the discarding of a machinery, project or equipment. The purpose of Lifecycle costing is to help decision making. It helps made decisions regarding the selection of the alternative with the lowest long term cost of ownership. The buying costs are used for purchases based on payback period calculations but Lifecycle costing is required to show that the savings from the investment are required to justify investment costs.

    There is a large number of methods that are used for calculation of Lifecycle costing. One common method is the discounted pay back method which takes time value of money into account. further, a net present value method can be used this takes the time value of money into account. The equivalent annual cost method and the internal rate of return are some of the other methods used for economic evaluation in Lifecycle costing.

    There is wide applicability for The Sparkling Automobile Company. When a new spark plug is developed it is advisable that the company should calculate cradle to grave costs so that a more realistic cost of developing a new type of spark plug is calculated. In the development of a new spark plugs with exceptionally long life the costs that should be calculated are those of planning, design, development, production, improvement, adding of features, depreciation and cost of financing of R&D throughout the lifetime and withdrawal of the sparkplug. What is important is that in the context of The Sparkling Automobile Company, the development of new sparkplugs costs will also include the cost of adding refinements and making improvements throughout its lifecycle. Currently, The Sparkling Automobile Company is only considering the capital costs of research and development of spark-plugs. However if it uses Lifecycle costing, the company will seek to minimize whole-life costs throughout the life of each sparkplug. The main benefit that will accrue to The Sparkling Automobile Company is that costs that occur after the sparkplug has been developed like ...

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    This response presents a brilliant discussion on Life Cycle