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

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.

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.

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.

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.

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.

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.

$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.

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.

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.

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.

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.

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.

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.

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.

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.  

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.

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.

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.

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.

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.