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Total cost accounting: definition & important aspects for buyers
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Total cost accounting in a nutshell:
Total cost accounting systematically records all direct and indirect costs associated with the procurement, use and disposal of a product or service. For purchasing, it is an essential tool for supplier selection and cost transparency, as it reveals hidden follow-up costs and enables real comparisons of profitability.
Example: When purchasing a production system for 250,000 euros, installation (15,000 euros), maintenance (8,000 euros/year), energy (12,000 euros/year) and disposal costs (20,000 euros) are taken into account in addition to the purchase price over the planned useful life of 10 years, resulting in total costs of 450,000 euros.
Contents
Total cost accounting in purchasing controlling
What is total cost accounting?
Total cost accounting is a business management method for recording and evaluating all costs incurred by a company over a certain period of time. It takes into account both fixed and variable costs and provides a comprehensive overview of the cost structure. The aim is to analyze the profitability of processes and products and make well-founded decisions to reduce costs and increase efficiency.
Core elements of total cost accounting
Relevance of total cost accounting in purchasing
In purchasing, total cost accounting plays a decisive role in the evaluation of procurement decisions. By analyzing all costs incurred, buyers can identify hidden costs and take the total cost of ownership (TCO) into account. This enables a holistic view of supplier offers and supports strategic decisions regarding supplier selection, price negotiations and long-term cooperation.
Application of total cost accounting in purchasing
Total cost accounting enables purchasers to analyze all costs associated with a procurement. In addition to the pure purchase price, transportation, storage, quality and follow-up costs are also taken into account. This allows hidden costs to be identified and well-founded purchasing decisions to be made.
Calculation example
Situation:
A company requires 1,000 units of a component. There are two suppliers to choose from:
- Supplier A: Unit price 50 €, delivery time 2 weeks, quality defect rate 1 %, transportation costs 500 €
- Supplier B: Unit price €45, delivery time 4 weeks, quality defect rate 5%, transportation costs €1,000
In addition, each faulty item incurs quality costs of €20 for rework or replacement.
Cost calculation:
1. direct material costs:
Supplier A: 1,000 pieces x 50 € = 50,000 €
Supplier B: 1,000 pieces x 45 € = 45,000 €
2. transportation costs:
Supplier A: 500 €
Supplier B: 1.000 €
3. quality costs:
Supplier A: 1,000 pieces x 1 % x 20 € = 200 €
Supplier B: 1,000 units x 5 % x 20 € = 1,000 €
Total costs:
Supplier A: 50,000 € + 500 € + 200 € = 50,700 €
Supplier B: 45,000 € + 1,000 € + 1,000 € = 47,000 €
Decision:
Although supplier B has higher transportation and quality costs, the lower unit price and the total cost consideration lead to savings of € 3,700 compared to supplier A. Therefore, supplier B is the more cost-effective choice considering the total cost calculation.
Evaluation and strategic findings
✓ Critical success factors
→ Precise data collection: systematic collection of all relevant cost factors along the entire supply chain
→ Process integration: anchoring total cost accounting in standard supplier selection and evaluation processes
→ Cost allocation: Transparent allocation of indirect costs to specific procurement processes
⚠ Challenges
→ Complexity management: difficulty in recording and evaluating hidden costs, especially in global supply chains
→ Data availability: Not all relevant cost factors are always quantifiable or available in a timely manner
→ Implementation effort: High initial effort for system adjustments and employee training
Future trends and strategic implications:
"Total cost accounting is becoming the central management tool for sustainable procurement decisions."
→ Integration of sustainability costs (CO2 balance, social factors)
→ Predictive analytics for proactive cost management
→ Automated cost scenarios through AI-supported systems
→ Real-time cost transparency in the supply chain
Conclusion on total cost accounting
Total cost accounting is an indispensable tool for strategic purchasing decisions. By taking into account all direct and indirect costs, it enables a holistic evaluation of procurement options. Despite initial challenges during implementation, it leads to optimized supplier relationships and sustainable cost savings. With increasing digitalization and the integration of sustainability aspects, its importance for successful supply chain management will continue to grow.
