What is the Total Cost of Ownership and how is it calculated
What is the Total Cost of Ownership and how is it calculated - infoweb24.com

What is the Total Cost of Ownership and how is it calculated?

What is the Total Cost of Ownership and how is it calculated?

Total Cost of Ownership is an important tool used by businesses to control and manage purchasing costs. The total cost of ownership, an overview of the type of purchase of a company, the value that the company receives as a result of the purchase, the cost of use, and long-term maintenance of a product.

In this article, we will look at the importance and how managers and business owners can use it to their advantage.

What is the total cost of ownership?

It is a calculation designed to help businesses make financial decisions. This calculation examines the total long-term cost of an item from purchase to disposal, including costs such as service, repairs, storage, and insurance. Items that have a lower total cost of ownership have more long-term value but can have the lowest cost at the time of purchase.

Businesses can use the full cost of ownership for the following:

  • Determine the total cost of a product or service over the entire product life cycle
  • Analyze performance metrics to find the total cost of ownership of past purchases and decide whether to change or continue working with a regular order
  • Provide an accurate picture of all business activities and their performance
  • Gives owners and managers a plan to make informed business decisions
  • Compare all the various variables associated with the purchase, including overhead costs, implementation costs, staff training, transportation, installation, operating costs, and many other costs, to decide whether to continue or not.
  • Decide whether internal management of the performance or use of the contractor is cost-effective

The total cost of ownership history

Some experts claim that the concept of it dates back to the Napoleonic era when engineers tried to evaluate the performance of cannons by analyzing the service life and repairs required.

But one thing is certain: the total-cost-of-ownership approach was formalized by the US Department of Defense when it wanted to estimate the total cost of a defense plan. This project led to the publication of the military standard in the late 1990s.

Since then, this method has been used by companies, especially in the industrial sector, to calculate the cost of production and thus determine their margins and selling prices.

The main components of the total cost of ownership

What is the Total Cost of Ownership and how is it calculated
What is the Total Cost of Ownership and how is it calculated – infoweb24.com

There are three main components to calculating:

  • Purchase costs / physical hardware
  • Operating costs
  • Personnel costs
  • Let’s examine each one.

1- Purchasing costs

Purchases / Hardware costs include the cost of pre-tax and post-tax equipment or assets, discounts, incentives, and closing costs. Sometimes these include disposable accessories or upgrades to install or use the asset.

2- Operating costs

Operating costs include subscriptions or services required for use by the business. These costs include:

  • Water and electricity costs
  • Direct operator operator
  • Basic training costs
  • 3- Personnel costs
  • Staff overhead costs may include:
  • Administrative staff
  • Equipment support personnel
  • Housing facilities for equipment and operators
  • This may include ongoing training and troubleshooting of the workforce for maintenance purposes.

Why is the total cost of ownership important?

For buyers, the initial cost of buying a product can be small compared to the annual cost. It is a significant part of cost-benefit analysis, a method that most businesses use to compare the costs and potential benefits of any action or decision. Vendors can also provide an estimate of the total cost of ownership and compare their products with competitors to attract customers.

Here are some additional benefits to impacting the total cost of ownership of your business:

Protection against industry or economic conditions

It can protect your company from industry conditions, natural disasters, theft, or falling prices without affecting profits. By taking risks, you can focus more on growing your business and outperforming competitors to increase sales and profits.

Helps measure sustained efforts

It provides managers with a convenient and understandable framework for describing and measuring the effects of sustainability. You can use it by analyzing the life cycle and similar methods to find cost-saving opportunities.

It also helps your company protect the environment by saving on resources such as water, fuel, and electricity. In turn, prioritizing environmental impacts can even help your business attract customers who care about protecting the planet’s natural resources and health.

Your target audience may want to pay more for a deal with an organization focused on sustainable action.

Improves supplier relationships

Having a strong relationship with suppliers allows you to accurately predict costs, pre-order, and avoid last-minute changes. By announcing that you are calculating the total cost of ownership of the goods they give you, you will facilitate the process of achieving the best possible price while addressing other issues of interest to the supplier, such as adhering to labor laws and fair dealing with others.


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