What is the total cost of ownership?

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.

What is an example of the total cost of ownership?

Let's consider an example in the context of buying and operating a new asset for your factory floor:

  • Acquisition cost: This includes the price of the asset itself, the sales tax, and any licensing and registration fees. For example, let's say you buy a new asset for $30,000. The sales tax and licensing fees cost an additional $2,500, so the initial cost is $32,500.
  • Financing cost: If you take out a loan to buy the asset, you'll also have to consider interest. If your loan term is five years at an annual interest rate of 3%, the total interest paid over the life of the loan will be approximately $2,373.
  • Operational costs: These include the costs for maintenance and repairs. If your annual costs for these are $2,500 and you own the asset for five years, this will add up to $12,500.
  • Depreciation cost: Assets often depreciate over time. If, after five years, you sell the asset for $15,000, the depreciation cost is $30,000 (initial cost) - $15,000 (resale value) = $15,000.

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.

How do you calculate the total cost of ownership?

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.

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What are the benefits of tracking the total cost of ownership?

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:

  • Your operations
  • The supply chain
  • Customers
  • Competitors
  • Industry trends

Total cost of ownership gives you the accurate total cost of a product or service

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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