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Electricity, maintenance and staff costs associated with the servers used for hosting the app.

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The required information is given below:

Costing per subscriber

Direct costs- cost directly associated with product

Development cost of $50000

Royalty contains fixed cost of $60,000and variable $0.90

Indirect cost- not directly associated and may contain costs of other products too

The infrastructure cost-as servers used for other products too.

The IT cost of staff as the staff will be utilized for other products too.

For costing indirect costs we need to porportion cost utilized by Hafpenny app as per the labor hrs utilized on the app by IT and for the server

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The number of subscribers should be estimated over the whole life span of the app. Even if subscriber count could be accurately estimated per year, it is hard to predict how long the app will be viable and relevant for given ever-changing advancements in technology despite chances to upgrade.

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The number of subscribers should be estimated over the whole life span of the app. Even if subscriber count could be accurately estimated per year, it is hard to predict how long the app will be viable and relevant for given ever-changing advancements in technology despite chances to upgrade.

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Direct costs associated with the app- any new IT staff, .90 fee to Flora per sub, App dev fees and ongoing maintenance. Future fees associated wit upgrades etc. Indirect fees- IT systems, servers etc. Divide these by total number of subs. Must think over life of app

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In order to calculate the cost per subscriber we will need to determine the number of app subscribers we are likely to attract over the lifetime of the app in order to ascertain what future costs will be and a clear basis for how to share/split the costs this will be difficult as this is a new function to halfpenny so we are unclear on the growth and we would need to look at other competitors or the market to see what interest is in order to share these over the number of subscribers

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The direct cost of K$0.90 per subscriber can be directly attributed per subscriber. Other direct costs to be split per subscriber are the development and testing costs of K$50,000 we will pay FFF Apps plus the additional fees charged for any updates to the app and the K$60,000 owed to Flora Psomi. These three costs will need to be divided between the estimated number of subscribers over the lifetime of the app.

The indirect costs would be the upgrades to the servers as these are not for sole use on the app, they are used in other parts of the business. The other indirect cost is the extra IT staff employed as they may work on more areas than just the app. However, if the IT staff only work on the app, then this will be put as a direct cost instead and be apportioned to the estimated number of subscriber over the lifetime of the app.

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Hard to predict future support fees- will there be bugs? Tech changes, advancements. Do we know how many subs we expect over the life of app? Do we even know what the life of the app will be at this point? This is a new market for us, do we know the demand and how steady this will be? Difficult to calc indirect costs i.e IT services already used in company. Can we use est hours on app task to apportion for IT and servers for example?

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There needs to be an appropriate methodology determined for allocating the indirect costs of the app. If the IT staff do not work 100% for the app’s technical support then this would be an indirect cost that needs attributing to the app. One way to determine how the IT staff’s time would be allocated to the app could be the time spent on each separate activity (for instance, how much of their time was spent on app support when compared to other products/services). This is not necessarily an appropriate methodology and it may be difficult to determine how best these costs should be allocated. The same applies to the server costs. As these are an indirect cost it will be difficult to determine how these should be appropriately allocated to the apps cost, on what basis should they be allocated.

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There will be a significant initial investment in the development of the app (K$50000 to FFF Apps & K$60000 to Flora), and it will take some time to feel the benefit of the investment. Whilst Halfpenny will be able to collect customer data and receive revenue from the subscription fees, this will be difficult to estimate and quantify from the outset (eg.: while pitching to investors). Further, there is a risk of the unknown as once Halfpenny has a number of subscribers, they will be free to quit their membership within a certain notice period, and could leave quickly, meaning it can be difficult for Halfpenny to forecast its costs and revenue from the subscribers.

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Direct Costs

There is one direct cost that is specifically attributable to each subscriber which is the K$0.90 per subscriber paid to Flora Psomi. There is also Research and Development costs which are direct costs specifically associated with the app of K$110,000. Incorporated as a Direct cost attributable to the app would also be any future fees associated with the upgrades that occur over the lifetime of the app.

Indirect Costs

The indirect costs associated with the app would be the Server Upgrade and any other IT Systems which would be need to facilitate the apps success. Any additional staff employed will also be an indirect cost as they will be across the organisation unless they are specifically hired for the app and then this will become a direct cost.

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We should negotiate with the app company to get a schedule of payments to show what the future fees and upgrades may look like and when these may be required in order to include these to our direct cists for the app going forward as a basis to our costing model

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If the app is distributed through app stores (like Apple or Google Play), a percentage of any paid subscriptions might go to them like a royalty/precentage. Even if the app is free, there could be hidden platform costs or payment processing fees. These reduce the net income per subscriber, so not factoring them in could give a misleading idea of profitability.

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We are initially paying out £50,000 to AFF apps when the application has been fully developed and tested along with £60,000 to Flora. These are our direct costs for the App.

We will also need to pay £0.90 per subscriber that use the app. These are our direct costs for the subscribers.

The above costs will make up our direct costs for the project.

The subscriber costs alongside the app costs and any predicted future upgrades will need to be factored in when we are calculating a cost for the subscription.

Servers will need to be upgraded and more IT staff employed to be able to host the app. These will be our indirect costs. As these are indirect costs they will fall under overhead costs. We will absorb these overhead costs based on machine hours as Halfpenny uses an absorption costing technique based on machine hours.

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As the app collects user data, even just emails or activity logs, there will be compliance responsibilities under data protection laws (like GDPR if Keeland follows similar rules). This could mean extra legal, IT security or admin costs, especially if users need to be able to delete data or request copies of it. These costs often aren’t obvious at the start but can build over time, especially as the user base grows just to comply with them

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difficulties in calculating the direct cost per subscriber

The fixed cost are to be spread over the number of subscribers which are completely estimated based on the ongoing trend. This can go completely wrong as it is just based on trend and no historical data or probabilities.

Calculating the proportion of Half penny cost in the indirect costs may not be easy as currently the are absorbing based on machine hrs while these indirect costs like IT are labor intensive.

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Estimating the number of subscribers over the lifetime of the app is difficult. How do we know the how long the app will be in use? Estimating the number of subscribers over one year can be difficult enough without having to estimate over a longer period.

We need some detail in relation to the IT costs we may incur for updates made by FFF Apps so that we can budget for them.

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Things to consider when costing per subscriber.

Indirect Costs

Indirect costs are costs that cannot be directly costed to the app. The indirect costs would be the IT staff if they were not hired to just work directly on the app. If they were it will be classed as direct.

Also you mentioned that servers will need to be upgraded. If these servers are for the whole of Halfpenny this will be an indirect cost. If it is a new server specifically for the new app it will be a direct cost.

Indirect costs might include the variable overheads like electricity to run the servers or maintenance people for the building they are hosted in.

Direct Costs

Direct costs are costs that can be directly costed to the new app. The $50k to FFF Apps is a direct cost. The $60k to Flora Psomi is a direct cost.

Direct costs will also need to be considered for updating and maintain the app. It is mentioned the app will be used for recipes and videos, these will need creating, updating and loading. It also mentions being able to order products on the app. Any new products and pricing will need to be maintained and kept up to date, this will be a direct cost.

$0.90 is to be paid to Flora Psomi out of the fee we charge so this will also need to be considered when costing per subscriber.

Cost per subscriber

It is hard to determine what the amount to be charged should be right now. Firstly you will need to estimate how many subscribers you will get and then divide the direct costs between that number. You will need to estimate the direct costs and do the same calculation per estimated number of subscribers, also adding in the $0.90 royalty.

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The up-front payment to FFF Apps of $50,000k is an example of a direct fixed cost and should be capitalised or spread across the expected number of app users to calculate a cost per subscriber.

If we anticipate, 25,000 subscribers, this portion will contribute K$2.00 per subscriber. However, the actual cost per-subscriber will fluctuate based on take-up. As Halfpenny is launching its plant-based range via Healthy Stuff Ltd there is opportunity for high uptake particularly as this aligns with growing trends in health-conscious eating.

FFF Apps will provide upgrades for additional fees, which would be classified as semi-variable and indirect. These could be feature updates to bug fixes or user experience improvements.

As the app will be hosted by Halfpenny, we will incur indirect IT costs such as server upgrades and additional IT staffing. These are mostly fixed in the short term but may increase in step-changes as the subscriber base grows.

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There will be numerous difficulties associated with the cost calculation and cost management of the app. One of which would be the estimation of any upgrades that would need to be provided by FFF over the lifetime of the app, this could be alleviated by yearly reviews of the product in which we could assess the functionality. Another difficulty associated with the app is the number of subscribers estimated across the lifetime of the app, this is difficult to predict as there is no historical data associated with the app and the app could be seen as outdated at any point through our plan and become obselete. This will see a higher churn rate of customers and lead to decreasing profits. The indirect costs associated with the app of the IT Staff is another difficulty as we have discussed previosuly the potential adoption of ABC we would need to be able to accurately assess the time spent by staff o the app in order to correctly apportion the cost. There will also be many hidden costs such as compliance with data regulations and marketing associated with the app that have not thus far been mentioned and would need to be calculated in some capacity over the apps lifetime.

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Direct costs - directly associated with the app;

$0.90 per subscriber

Development costs $50,000

$60,000 payment

The $0.90 can be included in the calculation for cost per subscriber. The other costs could be split between the subscribers and spread over the life span of the app. However it may be difficult to attribute these other direct costs per subscriber as we do not know how many subscribers we will have, or exactly how long the app will last.

Indirect costs;

We will need to include indirect costs within the calculation for the cost per subscriber. This includes the ongoing costs of the app including the upgrades that will be provided by FFF. The additional IT staff that will be employed, we need to consider if they will be full time in maintaining the app to understand how to allocate their costs. We will also need to distribute the costs of the upgraded server that is required. Halfpenny currently absorb their overheads on a machine hour basis, we will need to consider if that is a suitable application for these indirect costs, or if we would be better to use a different absorption rate, perhaps labour hours if we are employing new staff specifically for the app. We will then need to split these costs between the subscribers and allocate to the apps life span.

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The cost per subscriber is comprised of both the direct costs, or the prime costs, as well as the indirect costs of production. The most obvious cost per subscriber is the $0.90 paid to Flora Psomi. The direct costs of $50,000 and $60,000 are significant, and are the most obvious direct costs associated with the app. Direct labour associated with the production of the app must also be considered. Indirect costs include the technological costs such as the cloud or server required to produce the app, and other project specific costs such as registration fees to get set up on the app store.

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One difficulty that will come with developing and then costing this app is that overheads may be difficult to allocate. With overhead costs for physical products a cost driver can usually be determined quite easily but this is more difficult when dealing with digital products as there might not be an obvious activity occurring for which costs can be associated with. This means that determining how the overhead costs will be absorbed per subscriber will be challenging.

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How to Calculate the Cost per Subscriber

When looking at how we can calculate our cost per subscriber of our newly developed app, we will need to consider both direct and indirect costs.

In terms of direct costs, we can see that we will be charged K0.90 per subscriber to the app in a fee to Flora Psomi. This is the only direct cost that we have visible currently.

To calculate our cost per subscriber, we will need to take this K0.90, and then any additional costs that we determine to be direct of the application, and then we will divide this against the number of subscribers that we have at any one point in time.

We would then need to consider our indirect costs. So far, we can see that these will include the K50,000 for the development of the application, and K60,000 to Flora Psomi. This is a total of K110,000 of costs. There is also an undefined amount being needed to cost for hosting of the app (which we will be doing in house), server upgrades to facilitate this hosting, as well as new IT staff to cover the additional labour demand. These latter costs have not been explicitly stated, so will need to be reviewed when they come to fruition. Again, we would need to determine a type of costing systems to use here, such as activity based costing, and take our costs, determine the drivers, and then pool them together to calculate a basis on which we can apportion costs per subscriber to the app.

We are currently using an absorption based costing system on machine hours. This shows a great example of when using generic absorption costing can not work in all scenarios. As we will be costing our overheads for our digital app on something that has no connection to it. Instead, we would want to potentially move towards an activity based costing.

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Calculating the cost per subscriber would include all the costs that can be clearly associated to each subscriber, like royalty fees from subscribers signing up to the app and any upfront costs like development, testing and establishment of servers. In Halfpennys case this would the $50,000 paid to FFF Apps and $60,000 paid to Flora Psomi, alongside the $0.90 paid per subscriber. The cost per subscriber of the app will be any direct costs per user, plus the total of any other direct costs associated with the app divided by the number of app users plus an appropriate share of any indirect costs associated with the app.

Indirect costs are more difficult to calculate because this can include a lot of costs that are not directly attributable to the subscriber, like electricity used to maintain servers or ongoing technical support of the app provided by the IT staff. Halfpenny currently uses on OAR on the basis of machine hours to calculate some of its indirect costs, what might be more appropriate in this case like the IT staff employed, would be to use an OAR on the basis of labour hours. Another suggestion would be to use ABC costing to allocated indirect costs, which could be based on the amount of customer support queries from subscribers.

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A briefing paper explaining how to calculate the cost per subscriber and the difficulties associated with it.

To calculate the total cost per subscriber, we would need to estimate the number of subscribers and the estimated lifetime of the app.

The total cost per subscriber of the app will be calculated by adding together any direct cost of the app per subscriber and the appropriate share of the direct costs associated with the specific app plus any share of any indirect costs associated with the app.

The total cost will then be divided by the number of subscribers to arrive at the per-subscriber cost.

Direct cost per subscriber

From the information given regarding the app cost per subscriber, we can see that only direct fee per subscriber will be K$0.90 per subscriber payable to Flora Psomi. This is because we will be paying this based on the number of subscribers to the app.

Direct cost per specific app

The cost payable to FFF Apps of K$50000after the app is fully developed and tested, plus future costs for any upgrades in the form of additional fees plus any future functionality costs related to Halfpanny ‘s app, will be the direct cost for this app, together with K$60000 payable to Flora Psomi.

Indirect cost of the app

These are the costs that can not be directly attributed to the Halfpenny’s app only for example :

Cost of our server and any maintaining cost for the server as we would use to host other applications not only the app.

The same applies to our IT staff who would be working not only on the app but across the whole IT function, unless we employ staff to deal only with this app specifically, then this cost would be direct cost.

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In order to calculate the costs per subscriber we would need to account for both direct and indirect costs.

Direct costs would be those costs directly associated with the product, which would not otherwise be incurred by the business. These include the $0.90 per subscriber fee as well as the $110,000 in development fees to both Flora and FFF Apps. Any upgrade and maintenance fees required for the app to FFF apps will also be a direct cost of the app. These costs can be totalled and then split by the number of subscribers generated by the app.

Indirect costs would be costs that are incurred as part of delivering the app but that are not wholly attributable to it. This would be costs such as electricity, the rent for the office space required by workers, including those maintaining the app, and the general maintenance of servers. These costs would be attributed based on absorption costing principles, being attributed to the app based upon the machine hours used by the production and maintenance of the app.

The additional workers and upgrading of the servers could fall under either of these categories, based on whether an upgrade to the server is specifically needed for the app or a general requirement for the business and whether the additional IT workers specifically work on the app. These costs would likely be indirect and would therefore needed to be costed using the absorption costing technique as part of the overheads.

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One difficulty is forecast accuracy. If actual uptake falls below our estimate, the fixed cost per user will rise, potentially affecting app profitability. This reinforces the importance of marketing the app effectively, leveraging Flora Psomi’s following to drive volume.

Also, variable app upgrade costs are not incurred in direct proportion to subscribers. A few large upgrades may be required regardless of subscriber count, while others may depend on user feedback or demand.

For Flora Psomi a difficulty lies in establishing whether the $60,000k is a one-off fee or an annual recurring cost. If it recurs, this will need to be included in yearly app costing.

Finally aportioning the indirect costs fairly is challenging. IT staff may support several business systems, and server use varies depending on app features (video content, interactive ordering, etc.) Also if user numbers exceed projections, a step cost may be incurred (e.g. needing a second IT technician or more server bandwidth), which is not reflected in a linear per-user cost model.

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Difficulties Associated with Costing a Digital App

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Difficulties Associated with Costing a Digital App

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When looking at the difficulties associated with the costing of our digital app, we can see that we will need to appreciate that digital costs often have extremely high fixed costs, (in our case, app development, celebrity chef fee), whereas direct variable costs are often very low (again, in our case, K0.90 per user). This can cause problems in deciding how to cost the project.

Other issues that we need to consider strongly are how we are planning on deriving what our subscriber count is going to be to apportion the costs. And if we use active user base, then how will that look for our app in the early stages of use when our subscriber base is low.

We also need to understand that a lot of the costs we are using here will be estimates. It is well known with technology and application development, that estimates unfortunately regularly come in lower than actual costs. This is something that we must factor in when we are carrying out this project, and also understanding unforeseen costs are very likely to appear which again will cause issues in us costing this application.

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I think one of the main difficulties with costing the subscription fee is estimating the number of subscribers. Will the app take off in the way Halfpenny hope? A lot of people use an app and subscription service to save time. This service is not offering home delivery you have to pick up from an outlet.

Another difficulty is knowing how many IT staff we would need to employ. There are always teething problems with this kind of development and how much they will cost will be hard to estimate at this moment. The other indirect costs are also hard to estimate for example electricity. This is also a cost that is likely to rise in the future.

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As this is a new venture for Halfpenny we are unsure of the costs of future upgrades for the app/servers. We are also unsure of if the app will be successful and if we will get enough subscribers to be able to cover our costs. The digital industry is an ever evolving space so we need to make sure that we are keeping up to date and in line with the market to make sure our app’s life cycle is not cut short.

We need to consider the trend of healthy/artisan breads and make sure that we are not investing into something that will in 6 months not be of interest to customers.

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It can be difficult to determine the lifespan of a digital product such as an app. These lifespans can be considered to be indefinite as with the correct support and updates there is no reason for the app to fail. There are therefore 2 potential approaches to costing.

Firstly the initial payment of $110,000 could be considered a sunk cost and therefore not relevant to the per subscriber cost. The per subscriber cost could then be calculated yearly based on the new subscriber fees of $0.90 per subscriber for that year, and on the other direct costs such as any direct maintenance and staff salaries, as well as the absorbed overheads for that year.

Alternatively a forecast could be produced based on the number of subscribers generated by other similar apps in the market, this could be estimated by the number of downloads other apps in the market have. Costs could then be split based on this forecasted number of subscribers with a provision put in place based on a % error.

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There are many potential difficulties associated with the production of this app, most notably the estimation of how many subscribers the app will attract. While it may be possible to estimate roughly over a period of a year or so (though even this will prove difficult due to the volatility of digital environments), doing this over the whole life span of the app will prove very difficult. With the hefty initial direct costs of $60,000 and $50,000, it could also be difficult for the company to remain afloat, as it will likely take time to recoup this investment while also having the continuous other costs such as wages and technological fixes/improvements to consider. It is also well known that the initial set up costs of technological products are the most significant part, with few marginal costs. This means that there will be other high initial costs to consider, in addition the two sums mentioned above. There is also the need for the app to be constantly evolving – if there are no new recipes or videos for example, subscribers will likely cancel as there is no reason for them to continue to pay once they have explored all the app’s initial offerings.

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There will be many difficulties with calculating the cost per subscriber. We have mentioned there will be indirect costs in relation to upgrades, however we will need to gain some understanding on how often upgrades are expected and an estimation of the costs. With this information we may have estimations to base our calculations on, however it will still be difficult to allocate this per subscriber without knowing how many subscribers we are expecting and how long the app will last. As this is a new product base for us and perhaps has a more targeted audience it may be difficult to understand how well this product will sell and how much interest the app will receive.

The same can be said for direct costs, if we are to split the fixed direct costs between the subscribers and over life span of the app we will need to have a forecast to base this on. As this is a new product range it will be difficult to use historical data from the business. We could look to gain some market research to understand how many of our customers would be interested in this product range and the use of the app. We can also look at competitors that are operating similar products with the use of an app.

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It will be necessary to calculate the total costs of the app over its lifetime, and the expected revenue it is expected to generate, however the lifespan of the app is hard to estimate. There are rapid changes in technology which make it even more difficult to estimate. There is also a unknown certainty of the use of the app from subscribers. Whilst there may be long term loyal customer who are subscribe and commit to well over the minimum spend each month, there may be a large cohort of subscribers, who use the app a few times and then unsubscribe. Making it difficult to quantify the overall revenue and benefits generated from the app. There is also the need to potentially update the app and the costs associated with this.

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When determining the cost per subscriber, we must consider the costs associated with providing this new subscription service, and share them amongst the number of subscribers using the app. These costs will be both direct and indirect costs, both of which must be approached differently, and the number of users must be estimated using data and spread across the app’s lifetime.

Direct Costs associated with the application

Direct costs are those that are directly attributable to the introduction of the app along with the direct costs of maintaining the app.

The first direct cost mentioned is the K$50,000 paid to FFF Apps. This is clearly a direct cost since it will be paid to the app developers. Next, are the additional fees paid to FFF Apps for upgrading the app. These fees are currently unknown and will likely be charged on a case-by-case basis, meaning we should review the cost per subscriber consistently.

The next direct cost mentioned is the K$60,000 to Flora Psomi, along with a K$0.90 royalty for each individual subscriber to the application. While we have the cost per subscriber here, if we are to determine a total cost for royalties then we must multiply the K$0.90 by the total number of subscribers as per our estimates.

Indirect Costs associated with the application

The key indirect cost listed is driven by improvements to our IT infrastructure, through upgrades to servers and employing additional IT staff. While it may be thought that additional IT staff are direct to the app, it is unlikely that they will work solely on the application, therefore we can absorb a proportion of their time into the cost of the app.

In addition, the upgraded servers will support the entirety of Halfpenny’s IT systems meaning they are not directly attributable to the new application.

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Difficulties Associated with calculating the cost per subscriber

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Difficulties Associated with calculating the cost per subscriber

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Demand for the application

The first issue is the unknown demand for the application, and thus the total users of the app. It is hard to predict how many people will want to pay for a subscription for our app when market conditions are constantly fluctuating. We have a significant % of the market share which should provide sufficient demand for the app, but with the current shift away from pre-sliced packaged bread it is possible that demand could be lower than we initially expect.

While our app offers a dynamic experience for the user, incorporating news, recipes and advice, the key consideration for consumers is likely to be Halfpenny products. Consumers are already satisfied with our products so they may feel subscribing to our app for a fee is unnecessary.

Future Costs

As previously mentioned, a lot of the costs associated with the application that are both direct and indirect will occur in the future. This goes for the app upgrades, IT maintenance and staff costs. The unpredictability of these costs makes it very difficult to determine an accurate and reliable cost per subscriber, before we have launched the app and had time to analyse data, and costs.

The cost of maintaining the IT servers is very difficult to predict since it is a complex and costly process. We may suffer a cybersecurity attack on our IT servers or application that would take significant investment to stop and prevent happening again. This cost would be very hard to allocate fairly, and the potential risk to our brand is a cost that cannot be easily determined.