A Research on Total Cost of Ownership and Firm Profitability

Abstract

Business managements take into account only the price of product or services for purchasing decisions. Considering only the purchasing price might pose a risk with respect to the business budget and it could decrease firm’s profitability performance. At this point, total cost of ownership (TCO) affects purchasing costs, supplier selection and firm profitability. TCO is a cost accounting tool and philosophy which aims at understanding the true cost of buying a particular good or service from a particular supplier. TCO helps selection of the optimal supplier with respect to all the direct and indirect costs in the life of the product/service. The risk of budget failure decreases and the sources of the company are used more effectively. Additionally, the profit of the company increases. The aim of this paper is to examine how TCO helps companies make true decisions on purchasing activities in terms of cost accounting and how firm profitability performance is affected.

Keywords: Total Cost of Ownership, Purchasing, Cost Accounting, Supplier Selection, Profitability