According to Wikipedia, ‘Total Cost of Ownership’ is defined as follows:
“A financial estimate intended to help buyers and owners determine the direct and indirect costs of a product or service.”
Essentially, it is designed to be a reflection of the costs that can be attributed to assets and would normally constitute the following components:
- Acquisition Costs
- Operating Costs
- Personnel Costs
Total Cost of Ownership is therefore a more holistic measure of the cost of control and use of an asset and will differ from the price of the asset which would normally only be equal to the acquisition costs element.
Total Cost of Ownership is a useful to measure when assessing the optimum maintenance strategy as it should allow for comparison between the costs of each if managers can create a ‘control’ asset which is constant across the different maintenance strategies.
This is the amount paid for the asset itself (after commissions or any other associated costs). This would normally be decreased by the residual value of an asset but this is not known (only estimated) up until the point of final sale or disposal.
These are the costs required to run the asset and may include subscription of licence fees as well as the maintenance costs. Assets can be maintained by a number of different maintenance strategies and this decision will impact the operating costs (as well as potentially the residual value).
Personnel overhead includes any administrative staffing or support personnel required in order to operate or maintain the equipment. When comparing the total cost of ownership, for example versus outsourced production, one should also apportion costs for the facility housing the asset in order to reflect true ownership costs.