What is Total Cost Of Ownership - TCO
Total cost of ownership (TCO) is the purchase price of an asset plus the costs of operation. When choosing among alternatives in a purchasing decision, buyers should look not just at an item's short-term price, which is its purchase price, but also at its long-term price, which is its total cost of ownership. The item with the lower total cost of ownership is the better value in the long run.
BREAKING DOWN Total Cost Of Ownership - TCO
Total cost of ownership is considered by companies and individuals when purchasing assets and making investments in capital projects. While these costs often are itemized separately on a company’s financial statements, comprehensive analysis of the cost of ownership is a common practice for business dealings. Companies use the total cost of ownership over the long term as a framework for analyzing business deals. 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.
Business Investment Example
An example of a business investment that requires 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 to 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.
Purchasing a Car
The purchase of a car is one example where such a 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. 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.