What is Total Cost?

Total cost is the total expenditure incurred to produce some type of output. From an accounting perspective, the total cost concept is more applicable to financial reporting, where overhead costs must be assigned to certain assets. Total cost is less applicable to short-term decision making, where it is more likely that only variable costs will be considered. In general, it is the most comprehensive view of invested funds. The alternative definitions for total cost are noted below.

Total Cost for Cost Accounting

Total cost refers to the aggregation of all types of costs related to a cost object, which means fixed costs, variable costs, and mixed costs. For example, the total cost of a product line includes not only the variable cost of the goods sold, but also the costs of advertising the products, running the production line on which the goods are manufactured, and replacing products under the company’s warranty program.

Total Cost for Investments

Total cost refers to all of the costs incurred to make an investment, which includes the cost of the investment, plus any broker commissions, taxes, licenses, and fees related to the transaction. All of these costs should be considered when deriving the return on investment.

For example, if an investor buys a bond for $1,000 and also pays a $25 commission and taxes of $10, then the eventual return on this investment should be based on a total cost of $1,035, not just the $1,000 cost of the bond.

Total Cost for Capital Budgeting

Total cost refers to the total cost of ownership, where the costs of ongoing operations, maintenance, and repairs, and the benefit of any residual value are considered alongside the initial purchase price of an asset. This approach gives a more comprehensive view of which asset to select when there are several alternatives available, though it is usually combined with an analysis of the net present value of the cash flows associated with the asset in question.

For example, a business is considering purchasing new equipment for its production facility, for which the related costs include the $200,000 base price of the machine, $20,000 for installation costs, $10,000 for shipping, $5,000 for training, and $10,000 for spare parts. This results in a total initial cost of $245,000. The business would then compare this investment to any potential benefits to determine whether it makes sense to purchase the equipment.