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The Structure of Organisations & Finance. Costs and Prices. Costs and Prices. What’s the difference. Costs and Pricing. Costs What it costs YOU to deliver a product or service Price Is what your CUSTOMER pays. Costs. Purchase costs Raw materials Equipment Costs Costs of Finance
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The Structure of Organisations &Finance Costs and Prices
Costs and Prices • What’s the difference Professional Issues
Costs and Pricing • Costs • What it costs YOU to deliver a product or service • Price • Is what your CUSTOMER pays Professional Issues
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
Costs of Running a Car • Cost £10,000 • Run for 3 years • Sell for £4,200 • 10,000 miles per year Professional Issues
Cost of Running a Car ….. No Inflation Professional Issues
Costs…… • Fixed • Premises • Administration • Sales & Marketing • Costs of Finance • Variable • Raw Materials • Direct Labour Costs Professional Issues
Fixed & Variable Costs • Production Units Can Have Fixed Costs • Independent of Sales • Magazine Publishing • Toy Manufactures • Software Development Professional Issues
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
Straight Line Depreciation Professional Issues
Reducing Balance Depreciation Professional Issues
Reducing Balance…….. • Need to Identify Classes of Equipment • Computers – High depreciation rate • Buildings - Low rate • Cars – Medium rate • Furniture – Low rate Professional Issues
Labour Costs • Salary plus on costs: • National Insurance • Pensions • Persons Day rate • Statutory & Ordinary Holidays • Sickness • Training • Idle time • Unchargeable Time Professional Issues
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
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
Pricing in the Computer Industry • Cost Plus Services • Fixed price • Products Professional Issues
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
Fixed price – Project Work • Total of: • Direct Labour • Bought in Items • Indirects • Profit added • Used in Competitive Tendering • Risks versus Profit 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
Customer Expectations Professional Issues
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
