Cost of ownership: Life cycle costing

TCO (Total Cost of Ownership) is an analysis that shows the lifetime costs associated with certain assets. It is also known as life cycle cost analysis. TCO includes not only the purchase cost but also significant costs for operating, maintaining, upgrading and deploying the assets. TCO Analysis–Areas of Application TCO analysis can reveal a significant difference in total lifecycle costs and purchase price for certain acquisitions. This is especially true if the costs are viewed over long ownership periods. In the current scenario, Total Cost of Ownership (TCO) is being increasingly used for supporting acquisitions and planning decisions related to a wide spectrum of assets that bring with them significant operating/maintenance costs, across the asset’s ownership life. TCO analysis is a key consideration when a company is faced with acquisition decisions related to computers, laboratory equipment, vehicles and factory machines. It is still a major concern in the above mentioned situations: Asset management.
Planning and budgeting.
Prioritizing capital acquisition proposals
Leasing versus buying decisions
Selection of vendors, etc.
TCO and Life-cycle cost analysis (LCCA).

The life-cycle cost analysis (LCCA), is a tool that helps to determine the most cost-effective option from among many alternatives in relation to owning, operating and purchasing objects/ processes. All costs are taken into account and added together to create a present value, also known as the net present value (NPV). The integral part of the Life-cycle cost analysis (LCA), total cost of ownership (TCO), is a financial estimate that helps buyers/ owners determine the indirect and direct costs of a product or system. It is a valuable management accounting concept and is often used in conjunction with full cost accounting, ecological economics, and/or social costs. TCO can be compared to doing business overseas. In the case of manufacturing it goes beyond initial manufacturing cycle durations or costs to make parts. TCO includes many costs associated with doing business, such as opportunity costs and ship-and-reship costs. It also includes incentives such as common language, tax credits and customer-oriented visits by suppliers. Concept TCO is a cost-centric method for determining the economic value of any investment. Financial benefit analysis considers the figures of the internal rate of return, return of investment, economic value added and rapid economic justification. It also considers return on IT. TCO analysis typically takes into account both acquisition costs and operating costs. It can be used to assess the viability of capital investment. It is also used by enterprises to compare products and processes, making it easier for credit markets and financing agencies to make strategic decisions. TCO is a measure of an organization’s total cost of assets and/or allied system over the course of all projects/processes. It provides a clear picture of its profitability metrics. What does TCO tell managers? TCO analysis reveals the “hidden costs” of asset ownership. It includes all costs associated with system acquisition and the labor costs of those who use/ support these systems. Instead of focusing on hardware/software costs, TCO analysis includes “people” costs. This is expense related to how employees are trained, employed and retained.