The Structure of Organisations
&
Finance
Costs and Prices
Professional Issues
Slide 1
Costs and Prices
What’s the difference
Professional Issues
Slide 2
Costs and Pricing
Costs
• What it costs YOU to deliver a product or service
Price
• Is what your CUSTOMER pays
Professional Issues
Slide 3
Costs
Purchase costs
– Raw materials
– Equipment Costs
Costs of Finance
– Interest Payable or Lost
Direct Labour Costs
– Salaries
– Pensions
Overhead Costs
– Premises, Admin, Sales & Marketing
– Not attributable to projects
Professional Issues
Slide 4
Costs of Running a Car
Cost £10,000
Run for 3 years
Sell for £4,200
10,000 miles per year
Professional Issues
Slide 5
Cost of Running a Car …..
Fixed Costs:
Depreciation
5800
Loss of Interest
927
Car Tax
475
Insurance
1500
Total Fixed
Costs
8702
No Inflation
29p/mile
Variable Costs:
Petrol
3300
Servicing
300
Total Fixed
3600
TOTAL COST
12302
Professional Issues
41p/mile
Slide 6
Costs……
Fixed
– Premises
– Administration
– Sales & Marketing
– Costs of Finance
Variable
– Raw Materials
– Direct Labour Costs
Professional Issues
Slide 7
Fixed & Variable Costs
Production Units Can Have Fixed Costs
– Independent of Sales
– Magazine Publishing
– Toy Manufactures
– Software Development
Professional Issues
Slide 8
Depreciation
Need to know value of Equipment and Stock
Too costly to revalue every Item
Simplified:
– Straight Line
– Reducing Balance
Must be Consistent and Used & Declared in
Annual Accounts
Professional Issues
Slide 9
Straight Line Depreciation
Year
Depreciation
End Year Value
1
2000
8000
2
2000
6000
3
2000
4000
4
2000
2000
Professional Issues
Slide 10
Reducing Balance Depreciation
Year
Depreciation
End Year Value
1
3000
7000
2
2100
4900
3
1470
3430
4
1029
2401
Professional Issues
Slide 11
Reducing Balance……..
Need to Identify Classes of Equipment
Computers – High depreciation rate
Buildings - Low rate
Cars – Medium rate
Furniture – Low rate
Professional Issues
Slide 12
Labour Costs
Salary plus on costs:
– National Insurance
– Pensions
Persons Day rate
– Statutory & Ordinary Holidays
– Sickness
– Training
– Idle time
– Unchargeable Time
Professional Issues
Slide 13
Staff Costs
Total Work Days 260
Junior Staff – 220 Chargeable days
Senior Staff - 160 Chargeable days
Junior on £20,000
– Cost £24,000 (No overheads)
– Overheads £24,400
– Cost per day = £220 per day
Professional Issues
Slide 14
Overhead Costs
Not Attributable to Particular project
– Building Costs
– Administration
•
•
•
•
Personnel
Finance
Sales & Marketing
Support
Fixed Costs and are very Real!!
Computer Industry
– 100% Small Company
– 200 – 250% Large Company
Professional Issues
Slide 15
Pricing
Professional Issues
Slide 16
Pricing in the Computer Industry
Cost Plus Services
Fixed price
Products
Professional Issues
Slide 17
Cost Plus - Project Work
Agree with Client your Costs per day
– Usually on Direct Labour
– Overhead
Agree Profit margin
“Body shopping”
Unsuitable today for projects but used to
supply skills/experience to customer
projects
Professional Issues
Slide 18
Fixed price – Project Work
Total of:
– Direct Labour
– Bought in Items
– Indirects
Profit added
Used in Competitive Tendering
Risks versus Profit
Professional Issues
Slide 19
Project Costings for F P jobs
Companies may differ in the way they do this
but basically the same idea
Professional Issues
Labour Costs
Arrange staff into levels, grades etc
Work out average salary in each grade
Work out average daily salary in each grade
Professional Issues
Labour Costs cont’d
Add to daily amount a sum of money to cover
the overheads
Therefore if all fee paying staff work then we
can cover our costs
Professional Issues
Add it up with more amounts!!
Add contingency
Add Hardware
Add Mark up
Add Profit
Arrive at the final “Price”
Professional Issues
Software Product Pricing
Marginal Costs Very Low
• Manual, Box and CD Rom < £10.00
Large Development Costs
Amortised over time
Sales proportional to marketing
Sales fall with increasing price
Professional Issues
Slide 24
Customer Expectations
Price
Nature (Low to High)
Free
Shareware etc. Some great
products (Winzip)
£20
Buyer’s Risk – Internet Sales
£100 -£500
High volume - Real Software –
Microsoft, Adobe
£10,000
Real product – low volume – Bugs
and Support
£100,000
On the drawing board!!
Professional Issues
Slide 25
Support and other Issues
Large percentage of income
• 10% - 25% of turnover
• Sage, Microsoft
Support & Updates
Must be Real and Valuable
Annual Licence fee charges
Per use Charges
Application Service Providers
Professional Issues
Slide 26