# Total Cost of Ownership: How It's Calculated With Example

![Total Cost of Ownership: The purchase price of an asset plus the costs of operation over its life span.](https://www.investopedia.com/thmb/RYr5_7xITkql2Q56QEuV8ztgan8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/totalcostofownership.asp-final-c09b08a2bcfd495aa00e4dc73cae5871.png)

*— Investopedia / Zoe Hansen*

## What Is Total Cost of Ownership?

The total cost of ownership (TCO) is the [purchase price](https://www.investopedia.com/terms/p/purchaseprice.asp) of an [asset](https://www.investopedia.com/terms/a/asset.asp) combined with the ongoing costs of operation. Assessing the TCO means examining the product's overall value over time.

When choosing among alternatives in a purchasing decision, buyers often look at an item’s short-term price, known as its purchase price. However they should also consider its long-term price, which is its total cost of ownership. These are the long-term costs and expenses incurred during the product’s useful life and ultimate disposal. The item with the lower total cost of ownership can be the better value in the [long run](https://www.investopedia.com/terms/l/longrun.asp).

### Key Takeaways

*   Total cost of ownership (TCO) includes the purchase price of a particular asset, plus operating costs, over the asset’s life span.
*   Looking at total cost of ownership is a way of assessing the long-term value of a purchase to a company or individual.
*   Corporations analyze business deals using total cost of ownership, while individuals assess potential purchases using TCO.

## How Total Cost of Ownership Works

Companies and individuals consider the total cost of ownership when buying assets and investing in [capital projects](https://www.investopedia.com/terms/c/capital-project.asp). For a business, the cost of purchase, operations, and maintenance are often itemized separately on financial statements. The former is booked as a [capital expenditure](https://www.investopedia.com/terms/c/capitalexpenditure.asp), while the latter is part of operating expenditures. A comprehensive analysis of the cost of ownership is a common practice for businesses.

Companies use total cost of ownership over the long term as a framework for analyzing business deals. Looking at total cost of ownership is a way of taking a more holistic approach that assesses the purchase from a broad perspective. This analysis includes the initial purchase price as well as all direct and indirect expenses.

While [direct expenses](https://www.investopedia.com/terms/d/directcost.asp) can be easily reported, companies most often seek to analyze all potential indirect expenses that can significantly influence whether to complete a purchase.

> **Important**
>
> The total cost of ownership looks at the cost of owning an asset over the long term, by assessing both its purchase price and the costs of operation.

## Example of Total Cost of Ownership

Let’s say a company is considering investing in a new computer system. While the initial purchase price of the system is an obvious consideration, TCO would also take into account:

*   Software costs
*   Installation and transition costs
*   Employee training
*   Security and disaster recovery expenses
*   Ongoing support and maintenance
*   Future upgrades

This comprehensive view helps the company assess whether the computer system’s long-term benefits outweigh its total costs.

For individuals, TCO can also influence purchasing decisions. For instance, a car’s total cost of ownership includes the purchase price and expenses like repairs, fuel, and insurance.

## How to Use Total Cost of Ownership

The purchase of a car is one example where cost comparison matters. Total cost of ownership of a car is not just the purchase price but also the expenses incurred through its use, such as repairs, insurance, and fuel.

The total cost of ownership analysis can be especially important when comparing a used car to a new car. A used car that appears to be a great bargain actually might have a total cost of ownership that is higher than that of a new car if the used car requires numerous repairs, while the new car has a three-year warranty that could cover repair charges.

In the automotive industry, leading consumer resource [Kelley Blue Book](https://www.investopedia.com/terms/b/bluebook.asp) provides buyers with details on total cost of ownership. This industry analysis is provided for various vehicles and includes a variety of expenses, such as fuel, insurance, repairs, and [depreciation](https://www.investopedia.com/terms/d/depreciation.asp).

## What Types of Costs Should Be Considered in Total Cost of Ownership (TCO)?

The components of TCO depend on the item but should always include the initial purchase price, costs associated with operating the item, ongoing maintenance, training needed, and how long the item is expected to last before replacement is needed.

## What Kinds of Purchases Benefit From a TCO Analysis?

Considering TCO is important before purchasing any item, especially larger purchases. Cars, homes, and other major purchases should have a TCO analysis. For businesses, a TCO analysis could apply to new technology or equipment needed for the job.

## What Resources Are Available to Help Determine TCO?

Any information source about the operating costs of an item will be helpful. Consumer Reports is a good source for many items, including technology and automobiles. Resources like Kelley Blue Book and Edmunds are good sources for information about auto purchases.

## The Bottom Line

Total cost of ownership is an important consideration for both businesses and individuals. When making a major purchase, don't just look at the upfront price—be sure to factor in long-term costs like maintenance, repairs, and energy consumption. A comprehensive TCO analysis ensures you’re making an informed decision, whether it’s for a business investment or a personal purchase.

> **Article Sources**
>
> 1.  Bureau of Transportation Statistics. "[Average Cost of Owning and Operating and Automobile](https://www.bts.gov/content/average-cost-owning-and-operating-automobilea-assuming-15000-vehicle-miles-year)."
>     
> 2.  Edmunds. "[Edmunds](https://www.edmunds.com/)."
>     
> 3.  Kelley Blue Book. "[Kelley Blue Book](https://www.kbb.com/)."