Total Costs of Ownership: a case study The purpose of this research paper is to provide a description of the phenomenon Total Cost of Ownership. This is done on the basis of a case study which is about supply manager Joe Smith who has to buy 1000 computers for his organization. Organizations tend to scrap on the purchase price of a product; where it is much more effectively and efficient to bargain on the other Costs of Ownership. Although in business life people tend to think that buying is always more expensive than leasing, the opposite is true. Leasing 1000 computers over a life span of 3 years is more profitable than buying them. Total Cost of Ownership a case study Introduction to the phenomenon It was the year 1987 when the Gartner Group popularized the form of full cost accounting named Total Cost of Ownership (TCO)(author, Gartner Total Cost of Ownership). Originally TCO was mainly used in the IT business sector. This changed in the 1980’s when it became clear to many organizations that there is a distinct difference between purchase price and full costs of a products ownership. This brings us towards the main strength of conducting a TCO analysis, besides taking the purchase costs into account, which consist of the amount a money an organization pays for the required service, product or capital outlay. It also considers 1. Acquisition costs; these can consist of sourcing, administration, freight, and taxes. 2. Usage costs, which consists of the costs associated with converting the given product or service into a finished product. And finally 3. End of life cycle costs; the costs or profits incurred when disposing of a product. TCO can be seen as a form of full cost accounting; it systematically collects and presents all the data for each proposed alternative. In the case of making a TCO model, also opportunity costs and present value are taken into account. Taking present value into account means; making a difference between future and past cash outlays. This way the time value of money can be considered when comparing the different alternatives. Opportunity costs finally can be described as: “The value of the next best alternative foregone as the result of making a decision”(Brue, 2005) Having explained the phenomenon TCO briefly, we can take a look at the case study presented to us. The case study-Buying 1000 Personal Computers “Supply manager Joe Smith was considering the purchase of 1,000 desktop Personal Computers (PC’s) for his organization.
Even though a myriad of tools and techniques learnt in the Strategic Cost Management and Strategic Business Analysis courses are not fully exploited in this essay, it is generally recognised that those techniques are useful for a corporate to formulate strategy, do strategic planning, control costing and quality, as well as eventually elevate its values, regardless the nature and size of organizations.
Historically the personal computer (PC) industry has sold its products at reasonably high prices yet garnered only small profit margins. One reason for this is the high competition in the PC industry which led to competitive pricing among producers. Analyzing the competitive environment of the PC industry, it is evident that there is very little barrier to entry in this market. PC's have very low physical uniqueness and are made of standard components that require very little expertise to assemble.
This also involves the role of manager who has to consider the relevance of costs, volume, and profit in making management decisions. In the organization, there are many cost drivers across various activities of it production process (Alnoor, B. el at 2012, pp.33-34). It can be classified in various ways and one beneficial way is relate to how they act in relation to the changes in the volume of activity (Atrill, P. el at 2013, pg.239). To begin with, fixed cost is when the quantity of product or volume of activity has changed while the cost of that activity still remains the same, for example, rental, insurance premiums, loan payments and others. Sometime, this might increase along with the volume of activities which called stepped fixed cost. This probably can be realized when the volume of activity has expanded over the limit of rental property which this will require to rent new property in order to fulfill the excess volume. However, ‘the shorter the time period, the greater the probability of the particular cost will be fix’ (Drury, C. 1992, pp.29-30). On the other hand, a variable cost will be change in direct proportion to change of volume of activity which means cost and activity will increase in the simultaneous direction. This cost use to represent cost per unit of individual product or service, which this might help to
Rational choice theory, developed by Ronald Clarke and Derek Cornish in 1985, is a revival of Cesare Becca...
"College Accounting Coach." Process Costing-Definitions And Features(Part1) « Process Costing « Cost Accounting «. Feb. 2007. Web
The process of making a decision for many is a disconcerting responsibility. While for others, making a decision is second nature. According to Browne et al., "Decisions are streams of choices. These streams contain bits of information, events, and choices (1998, p. 50)." The authors go on to state:
=[ (10,000 x 24) + ( 5,000 x 20 ) + ( 8,000 x 16 )] – 1,220,000
Historical cost method, over a period of time has been subject to many criticisms, especially as it considers the acquisition cost of an asset and does not recognise the current market value. Historical costs is only interested in cost allocations and not in the value of an asset. While it tells the user the acquisition cost of an asset and its depreciation in the following years, it ignores the possibility that the current market value of that asset may be higher or lower than it suggests.
The four techniques used for analyzing the costs and benefits of a proposed system is break-even analysis, payback analysis, cash-flow analysis, and present value analysis. Break-even analysis is a supply-side analysis. Only the costs of the sales is analyze with break-even. It does not analyze how demand may be affected at different price levels. A strength of break-even analysis it’s relatively simple concept and the formula can be easily understood and used by most people. Another strength is that it provides vital information when making a decision. Weaknesses of break-even analysis is it assumes that all output will be sold. It is difficult to apply break-even analysis when a company sells more than one product. Break-even cannot show what will definitely happen. The payback analysis method is the simplest analysis method to use when looking at one or more major project options. It tells you how long it will takes to earn back the money you will spend on the project. Payback analysis helps you decide you whether or not you should undertake the project. The biggest strength of the payback method is that it is simple. The payback analysis method is used to make quick evaluations of projects. Weaknesses of the payback method is that the method ignores the time value of money. The payback analysis method does not consider cash inflows from a project that may occur after the initial investment has been recovered. A cash flow analysis is a listing of the flows of cash into and out of the project. This is like your checking account at your bank. Deposits are the cash inflows and withdrawals are the cash outflows. The balance in your checking account is your net cash flow at a specific point in time...
Others feel that ABC would be more widespread in industry if it were marketed better by the cost accounting profession itself [1]. As the dust has settled, ABC has turned out to be less a revolutionary technique than a useful refinement to proven systems. The costs of products and services must be accurate, or management can be misled. Decisions... ...
The reduction in computer costs over time has the obvious implications of reduced overhead costs for a company’s management and possibly a smaller budget requirement for the information technologies department. Closer inspection of the lower computer costs shows that the reduced overhead can have a number of implications dependant on management decisions. One decision would be to show an increased profit on the end product’s margins. This makes stockholders very happy.
the view that an action is right if it is likely to produce the best
Therefore, to achieve this objective, managers have to make choices in decision-making, which is the process of selecting a course of action from two or more alternatives (Weihrich & Koontz; 1994, 199). A sound decision making requires extensive knowledge of economic theory and the tools of economic analysis, that are directly related in the process of decision-making. Since managerial economics is concerned with such economic theories and tools of analysis, it is very relevant to the managerial decision-making process.
Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. Activity-based costing is mostly used for internal decision making and managing activities while traditional costing method is used to provide data for external financial reports. Most organization uses activity-based costing as an addition system for using traditional absorption costing as sometimes the traditional cost system misleads the product’s profitability. In a company, there are many products on sale, if one product is sold at a high price with low product margin and a product with high product margin at a low price, it may result in a loss. In addition, due to the reason that cost drivers and enterprises business may change, activity-based costing analysis also needs to be revised periodically. This amendment should be prompted to change pricing, product, customer focus and market share strategy to improve corporate profitability.
Decision making is not only a single step or an idea which we could take to decide certain solution, decision making involved in all life aspects individually or organizationally. Mainly, theories state various factors and components which are able to influence, affect and modify the processes of decision making. Taking best decision at best moment seems to be a very complicated for many. Hundreds and thousands of ideas, methods and notes have been issued to theoretically establish a formula to decide which model is best for decision making. In (Jim Heskett, 2010) published paper: what is the best way to make carful decision making? he ends up his writing as he begun it, he assumes questions such as the topic ,however, he puts