Total cost is defined in three ways, depending on whether you are engaged in cost accounting, investments, or capital budgeting. In general, it is the most comprehensive view of invested funds. The alternatives are:
- Cost accounting view of total cost. 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 and running the production line on which the goods are manufactured.
- Investment view of total cost. 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.
- Capital budgeting view of total cost. 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.
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.