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Total Cost of OwnershipKnowledge Center |
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What is Total Cost of Ownership? DescriptionThe Total Cost of Ownership (TCO) method is a technique which can be used
to make sure that all associated costs over a given time period are considered
when you are acquiring an asset. Some examples of assets are: a building,
software or a truck. TCO can be described as all costs of owning and operating
an asset over time. TCO does not only reflect the costs of purchase. It also
includes all other aspects in the further use and maintenance of the asset. Origin of Total Cost of Ownership. HistoryTCO was originally developed in the late 1980s by research company Gartner to determine the cost of owning and deploying personal computers. Their initial findings were that PCs cost an enterprise nearly $10,000 per year. At that time this caused an upheaval among financial managers and IT directors. Calculation of Total Cost of Ownership. FormulaThere is no broad accepted formula for TCO. The main thought behind is that you need to consider all relevant costs which are related to an asset. The following list contains typical cost elements of Total Cost of Ownership. Purchase price. Installation costs. Financing costs. Commissioning costs. Energy costs. Repair costs. Upgrade costs. Conversion costs. Training costs. Support costs. Service costs. Maintenance costs. Downtime costs. Safety costs. Productivity costs. Risk costs. Disposal costs. Which factors should you use? This depends upon the industry where the asset will be used and the characteristics of the asset. (Software, computers, buildings, automobiles, equipment, plants, etc). Usage of Total Cost of Ownership method. ApplicationsAny purchase of a significant asset, that needs a comprehensive analysis of long-term effects and hidden costs. Strengths of Total Cost of Ownership. Benefits
Limitations of Total Cost of Ownership. Disadvantages
Compare with Total Cost of Ownership: Cost-Benefit Analysis | Activity Based Costing | Net Present Value | Discounted Cash Flow | Free Cash Flow | Business Intelligence | Payback Period Return to Management Hub: Decision-making & Valuation | Finance & Investing | Knowledge & Intangibles | Marketing & Sales |
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