how total cost of ownership works
total cost of ownership is considered by companies and individuals when they are looking to buy assets and make investments in capital projects for a business the cost of purchase and the costs of operations and maintenance are often itemized separately on financial statements the former is booked as a capital expenditure 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 can be easily reported companies most often seek to analyze all potential indirect expenses that can be of significant influence in deciding whether to complete a purchase 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 ownershipan example of a business investment that requires a thorough analysis of total cost of ownership is an investment in a new computer system the computer system has an initial purchase price additional costs often include new software installation transition costs employee training security costs disaster recovery planning ongoing support and future upgrades using these costs as a guide the company compares the advantages and disadvantages of purchasing the computer system as well as its overall benefit to the company for the long term on a smaller scale individuals also use total cost of ownership when making purchasing decisions while total cost of ownership can be overlooked its analysis is essential in preventing unnecessary future losses that can arise from focusing only on the immediate direct costs of a purchase 