A Comparison of Total Cost of Ownership with Two Other Costing Models

It has been researched that purchasing costs constitute a large chunk of company expenditure, sometimes taking as much as 80% of production costs (Cousins et al. 2008). This therefore implies that purchasing costs are vital in the overall performance of the company.   Many divisions such as finance, administration and logistics are usually involved in the process of procurement incorporating relationships with a number of suppliers ranging from arm’s length relationship to strategic partnerships (Lambert t al. 1996).The management of purchasing therefore constitutes management of a sizeable part of the organization (Zeng 2000). In recent time however, the role of the purchasing unit in many organizations has shifted dramatically. As purchasing is becoming more and more important in the scheme of events (Cousins and Spekman 2003), managers have had to focus on many other variables apart from the actual prices of goods and services from suppliers. While it has been argued that the role of management accounting in inter-organisational relationships is yet to be clearly determined (Dekker and Van Goor 2000), managers have come to recognize the concept of management accounting as critical in their make or buy decisions (Seal et al. 1999) and in the building of trust between parties in relationship (Tomkins 2001). Before now, the traditional accounting practices had come under heavy criticism for their inability to provide inter-organisational focus and the necessary costing information (Bast et al 2010). To provide the needed relevance and focus to the existing inter-organisational practices, a number of cost approaches have been developed. They include total cost of ownership (TCO), target costing (TC), activity based costing (ABC), direct product profitability (DPP) and cost-to-serve (CS). Kulmala et al. (2002) believe that these cost approaches can be applied in “finding lower cost solutions than would be possible if the firm and its buyers and suppliers attempted to...