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the planning, marketing, distribution, operation, maintenance and disposal of a product in order to promote the long-term competitive advantage of the company concerned.

In the literature, the terms “life cycle phase” and “life cycle stage” are used interchangeably. To eliminate confusion, for purposes of this study, the terms will be used as follows: A typical life cycle consists of four phases, namely introduction, growth, maturity and decline. There are different stages during each phase, for example the planning and design stage, which occurs during the introduction phase, and the manufacturing stage, which occurs during the growth phase.

Drury (2008:538) states that life cycle costing estimates and accumulates costs over a product’s entire life cycle to determine whether the profits earned during the manufacturing stage will cover the costs incurred during the pre- and postmanufacturing stages. Cost incurred during the different phases of a project should be identified and will provide insight into understanding and managing the total costs over the life cycle of a project.

Sakurai (1996:163) defines life cycle costing as a method used to calculate the costs of products or equipment over their entire life.

To emphasise the fact that all costs have to be taken into account, Hongren, Forster and Datar (2000:439) use the term “cradle-to-grave costing” and

“womb-to-tomb costing”.

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The life cycle refers to the use of a product from the time it is manufactured or purchased until it is discarded. According to the Japan CPA Association (Sakurai 1996:167), the life cycle has three elements: initial costs (research and development costs, planning, design, etc), normal costs (manufacturing costs, sales costs, etc), and final costs (repair costs, discontinuation costs, etc).

The actual life cycle ends when the product is no longer useful or worn out.

The final costs are generally the user’s responsibility.

The life cycle differs from one product to the next. For example, the life cycle of a building may be 50 years, while that of electronic toys may be less than a year. Meredith and Mantel (1995:13) define a project’s life cycle as the similar stages on the path from origin to completion, as illustrated by figure 2.1.

Figure 2.1 The project life cycle

Source:

Adapted from Meredith and Mantel (1995:13)

It is evident from the above discussion that the definition of a life cycle differs from one decision maker to the next. Emblemsvag (2003:17) provides the most comprehensive perspective of the term “life cycle costing”. He differentiates between the marketing, production, customer and social perspectives. He holds that the marketing, production and customer perspectives consider only

Time Slow

start

Quick momentum Slow finish 100 %

0

% Project completion

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costs that impact directly on a company’s bottom line, while the social perspective includes those activities and the associated costs borne by society.

The different perspectives are depicted in table 2.1 below.

Table 2.1 Interpretation of the term life cycle from different perspectives Marketing

perspective

Production perspective

Customer perspective

Societal perspective 1

2 3

4 5

Introduction Growth Maturity

Decline

Product conception Design

Product and process development

Production Logistics

Purchases Operating Support

Maintenance Disposal

Disposal Externalities

The product life cycle involves all the preceding perspectives except for the marketing perspective. The reason for this is that the product life cycle is at the individual level of each product unit, whereas the marketing life cycle is at the type level of a product.

Figure 2.2 is a generic representation of the product life cycle.

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Figure 2.2 Generic representation of a product life cycle

Mining

Environment:

air, sea, land

Material processing

Product

manufacture Distribution

Disposal Material demanufacture

Product demanufacture

Product take- back 2 1

4 3

Demanufacture Use

and service

Energy recovery with incineration

Clean fuel production

1 = Direct recycling/reuse

2 = Remanufacture of reusable components 3 = Reprocessing of recycled material 4 = Raw material regeneration

Source:

Adapted from Emblemsvag (2003:18)

Figure 2.2 illustrates that the product life cycle comprises the activities an individual part of the product performs, regardless of which decision makers are involved. For each activity or process, more detailed activities can be defined.

A manufacturer will focus on the upper half of the figure, and the customer on the right-hand side. Until recently, the lower half of the figure was left to society to handle while the left-hand side was ignored. Because of the increase in environmental problems, more laws and regulations have been made to respond to public demand.

According to the international trend, disposal costs are increasingly becoming the cost of the manufacturer or the user. In both Germany and Norway, take- back legislation exists. Hence it is becoming increasingly difficult for companies to escape their social responsibilities.

The graph in figure 2.3 depicts the market life cycle. The market life cycle is the progression of a specific product from market development to market decline. This cycle is similar to industry life cycles, business life cycles and even human life cycles - they all develop through the same four generic stages,

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namely introduction, growth, maturity and decline. The shape of the curve will depend on many different factors.

Figure 2.3 Market life cycle

SALES

Introduction Growth Maturity Decline Stages of Product Life

Source:

Adapted from Emblemsvag (2003:22)

It is evident that two unique life cycles exist, namely one at the individual product level (the product life cycle) and one at the product-type level (the market life cycle).

The life cycle of a project can also be divided into four major phases, namely introduction, growth, maturity and decline. These phases are discussed in detail in section 2.4.

Up to 80% of a product’s costs are committed during the planning and design stage, that is, during the introduction phase. The majority of costs, however, are incurred at the manufacturing stage during the growth phase, but they have become committed during the planning and design stage, in the introduction phase and are difficult to alter. Cost management can be most effectively exercised during the planning and design stage and not during the

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manufacturing stage when the product design and process have been determined and costs committed. Figure 2.4 illustrates the points argued thus far.

Figure 2.4 Costs committed versus costs incurred

Source:

Adapted from Emblemsvag (2003:2)

Figure 2.4 shows the figures for a manufacturing company. It is clear that although about 20% of the costs are actually incurred in the activities prior to production, these activities commit 80% percent of the costs. The production cost, however, incurs about 80% of the cost, but production improvement efforts impact on only about 20% of the cost commitment.

Figure 2.5 illustrates the distinction between the differential timing of incurred and committed costs. The gap is the greatest in the project planning and design stage during the introduction phase. A low proportion of product costs are incurred, but the decisions made in this phase lock in the cost incurred in the sales stage during the growth phase (Drury 2008:539; Garrison, Noreen &

Seal 2003:792).

20%

80%

80%

20%

Costs incurred Costs committed

Production costs Costs related, says to ° concept development ° design and engineering ° testing

° process Planning

Legend

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Figure 2.5 Relationship between cost committed and cost incurred

Source:

Adapted from Drury (2004:945); Garrison et al (2003:793)

It is apparent from Figure 2.5 that cost management can be most effectively exercised during the planning stage of a project and not the manufacturing stage when costs have been committed and product design and processes have been determined. During the manufacturing and sales stage, the focus should be more on cost containment than cost management.

Life cycle costing requires that the effects of time should be considered. Future costs have to be calculated by taking the time value of money (see sec 3.3) into account. Future costs such as operation and maintenance costs have to be converted into their appropriate values before adding them to procurement costs. Inflation should also be taken into account. Inflation has numerous causes, such as excess demand in the economy, high costs and an excessive increase in the money supply. Regardless of the causes behind inflation, it reduces the value of money (Dhillon 1989:29; Drury 2004:549; Emblemsvag 2003:165).

Costs committed

Product manufacturing and sales phase

Product planning

and design phase Costs incurred 100 %

Post- sales service and abandonment phase

Product life cycle phase

% of cost committed or incurred

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One may conclude from the above definitions that the life cycle cost concept consists of the following major elements:

š The time period or life cycle applicable to all possibilities being evaluated should be identified.

š All costs and revenues attributable to a project should be included, namely initial cost, normal cost and final cost, as well as revenues and proceeds from ultimate sale or other disposal.

š Only costs and revenues directly attributable to the project under consideration should be identified.

š The effects of time, such as inflation and the time value of money should be identified.

In this study, two of the research objectives relate to life cycle costing, namely to determine

(1) whether all costs over the life cycle of metallurgical research projects are included in the initial cost estimate of a project

(2) during which phases of the life cycle of metallurgical research projects the costs are determined, most of the costs are incurred and most of the costs are managed

The answers to the above objectives will be discussed in chapter 5. All costs will include initial costs (research and development costs, planning, design, etc), normal costs (manufacturing costs, sales costs, etc), and final costs (repair costs, discontinuation or disposal costs, etc). The project life cycle will be based on the phases a project goes through, namely introduction, growth, maturity and decline.

To provide background of life cycle costing, its development will now be discussed.

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