Total cost of ownership (TCO) is the total cost of a product or service over its lifetime. It includes all direct and indirect costs incurred for the product or service during its life cycle. It's important to note that TCO doesn't just mean purchase price; it also includes installation, maintenance, and other expenses associated with owning and using the product.
Let's consider an example in the context of buying and operating a new asset for your factory floor:
Adding all these costs together, the total cost of ownership for the asset over five years would be:
Acquisition: $32,500
Financing: $2,373
Operational: $12,500
Depreciation: $15,000
Total: $62,373
This gives a complete picture of the cost of buying, owning, and operating an asset beyond the initial price. The concept can similarly be applied to business investments, like purchasing a new piece of manufacturing equipment, implementing a software system, etc.
The total cost of ownership (TCO) is the total cost of a product over its entire life cycle. It's calculated by adding the initial purchase value to the hidden fees and subtracting a possible resale value or residual value.
The total cost of ownership is a powerful tool for understanding your business and making decisions that will help you grow. It gives you a better understanding of the following:
The total cost of ownership can be used to compare the costs of two or more products or services. This is often done when a department wants to purchase a new piece of equipment, but they are still determining if it will be worth the investment. By knowing your materials, labor, and overhead costs, you can use them to figure out a more accurate cost per unit.
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