What is the difference between ‘life-cycle costing’ and ‘target costing’?

Life-cycle costing is the profiling of costs over the life of a product, including the pre-production stage.

Unlike traditional management accounting systems, which are based on financial years, life-cycle costing tracks and accumulates the costs and revenues attributable to the product over the full life cycle, which may last for many years.

Target costing is an activity which is aimed at reducing the life-cycle costs of new products, by examining all possibilities for cost reduction at the research, development and production stage.

It is not a costing system, but a profit-planning system – the selling price and profit requirement are set during the research stage, thus creating a target cost.

The product is then developed and produced in such a way as to achieve this cost.

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CIMA does not provide legal, investment, professional or career advice. No responsibility or liability whatsoever is accepted for any error, omission or mis-statement (whetheror not arising out of negligence) or for any loss or damage sustained as a result of reliance on information supplied or comments made.

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