A Quick Introduction to Finance, Part II

A recent article over on CPO Agenda on Skills for the Future that summarized the findings from a recent workshop that debated the skills the future would require identified better finance skills as keys to future purchasing success. Since the article simply rambled off a list of terms with no definition, I decided I’d define the basics for you.

Cost Breakdown: is the process of breaking a cost down into its components.

Cost breakdowns are the basis of Total Landed Cost and Total Cost of Ownership calculations. For example, the cost breakdown of a transformer would be steel, labor & overhead, copper, oil, transportation, miscellaneous components, and supplier profit margin. The total landed cost would be the unit cost, the taxes, the export tariffs, the import duties, and the transportation and in-transit storage costs. The total cost of ownership would also include inventory costs, utilization costs, and waste / defective unit return costs.

Life-Cycle Cost Analysis: (also known as Whole Life Cost) refers to the total cost of ownership over the life of on asset. It starts with the costs incurred in the planning and design phases, includes production related costs such as new machinery or equipment, raw material costs, labor and overhead costs during production, distribution, maintenance, and eventual disposal. From a life-cycle cost perspective, the cost per unit is just one cost among many.

Cost Engineering: is an area of engineering practice concerned with the application of scientific techniques to cost estimating and cost control. It will use advanced statistics and cost models to try and accurately estimate the total cost of a product before it is built and to identify methods to control costs that could increase beyond acceptable bounds.

Share This on Linked In