How to Calculate the Total Cost of Ownership

When a company is thinking about purchasing something (e.g., equipment), it should look at the total cost of ownership, not just the purchase price.

The total cost of ownership includes costs like:
• Delivery/installation
• Training/support
• Repairs/maintenance
• Energy/fuel
• Insurance
• Environmental/disposal costs
• As well as the purchase price

The total cost of ownership is thus the sum of the purchase price and all the direct or indirect costs of ownership.

total cost of ownership = purchase price + direct and indirect costs of ownership

The total cost of ownership is sometimes called the “whole-life cost” because it includes all costs that occur throughout an asset’s life cycle, from the initial purchase to the disposal of the asset.

When it comes to procurement, it’s tempting to fixate on the purchase price because it’s clearly visible.

But an asset with a cheap initial purchase price might be more expensive to own than a competing product in the long-run.

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