What Is the Total Cost of Ownership?
The total cost of ownership (TCO) is the purchase price of an asset plus the costs of operation. Assessing the total cost of ownership represents taking a bigger picture look at what the product is and what its value is over time.
When choosing among alternatives in a purchasing decision, buyers should look not just at an item's short-term price, known as its purchase price, but also at its long-term price, which is its total cost of ownership. These are the long-term costs and expenses incurred during the product's useful life and ultimate disposal. The item with the lower total cost of ownership is the better value in the long run.
- The total cost of ownership (TCO) includes the purchase price of a particular asset, plus operating costs, over the asset's lifespan.
- Looking at the total cost of ownership is a way of assessing the long-term value of a purchase to a company or individual.
- Corporations use the total cost of ownership as a means of analyzing business deals, while individuals look at the total cost as a way of assessing potential purchases.
Understanding the Total Cost of Ownership
The total cost of ownership is considered by companies and individuals when they are looking to buy assets and make investments in capital projects. For a business, the cost of purchase and the costs of operations and maintenance are often itemized separately on financial statements. The former is booked as a capital expenditure while the latter is part of operating expenditures. A comprehensive analysis of the cost of ownership is a common practice for businesses.
Companies use the total cost of ownership over the long term as a framework for analyzing business deals. Looking at the total cost of ownership is a way of taking a more holistic approach that assesses the purchase from a broad perspective. This analysis includes the initial purchase price as well as all direct and indirect expenses.
While the direct expenses can be easily reported, companies most often seek to analyze all potential indirect expenses that can be of significant influence in deciding whether to complete a purchase.
The total cost of ownership looks at the cost of owning an asset long-term by assessing both its purchase price and the costs of operation.
Example of Total Cost of Ownership
An example of a business investment that requires a thorough analysis of the total cost of ownership is an investment in a new computer system. The computer system has an initial purchase price.
Additional costs often include new software, installation, transition costs, employee training, security costs, disaster recovery planning, ongoing support, and future upgrades. Using these costs as a guide, the company compares the advantages and disadvantages of purchasing the computer system as well as its overall benefit to the company for the long term.
On a smaller scale, individuals also use the total cost of ownership when making purchasing decisions. While the total cost of ownership can be overlooked, its analysis is essential in preventing unnecessary future losses that can arise from focusing only on the immediate direct costs of a purchase.
The purchase of a car is one example where the cost comparison matters. The total cost of ownership of a car is not just the purchase price but also the expenses incurred through its use, such as repairs, insurance, and fuel.
The total cost of ownership analysis can be especially important when comparing a used car to a new car. A used car that appears to be a great bargain actually might have a total cost of ownership that is higher than that of a new car if the used car requires numerous repairs while the new car has a three-year warranty that could cover repair charges.
In the automotive industry, leading consumer resource Kelley Blue Book provides buyers with details on the total cost of ownership. This industry analysis is provided for various vehicles and includes a variety of expenses such as fuel, insurance, repairs, and depreciation.