AC 1.2 is about estimating costs and prices — where the data comes from, how suppliers price, and the cost tools (break-even, price analysis, TCO/WLC) that underpin a business case. Aligned to AC 1.2.
1. Market data on costs and prices
Information on costs and prices comes from primary and secondary sources. Primary sources include communication with suppliers; the buyer's database of market data; suppliers' marketing communications; online market exchanges, auction sites and forums; advisory services; trade fairs/exhibitions/conferences; and informal networking. Secondary sources include the financial and trade press; published economic indices; published/online market analysis; government statistical surveys; and price-comparison websites.
2. Supplier pricing strategies (AC 1.2)
Cost-based strategies include full-cost pricing, cost-plus/mark-up pricing, marginal pricing, rate-of-return ('target return') pricing and contribution pricing. Market-driven strategies include price volume, market-share (penetration) pricing, market skimming, current-revenue (contribution) pricing, promotional pricing, market-segment (differential) pricing and competition (dynamic) pricing.
Factors influencing price include recovering all costs (labour, materials, overheads), desired profit, the extent of competition, wider economic factors, the nature of the buyer relationship, and the desirability of the buyer as a customer.
3. Direct and indirect costs (AC 1.2)
Direct costs relate directly to producing a particular product or process — raw materials, packaging, the wages of production staff. The aggregate of directly-traceable production costs — direct materials, direct labour and direct expenses — is also called the prime cost. Not all direct costs are variable: some fixed costs may relate directly to a specific product (e.g. depreciation on dedicated machinery). (Prime cost is a production-cost aggregate, not a synonym for variable costs.) Indirect costs (overheads) do not relate directly to a product — rent, insurance, office-staff wages, general marketing. They are usually the same as fixed costs, though some indirect costs are variable (e.g. energy). Costs can also be classified as fixed, variable or semi-variable. In Porter's value chain (Porter, 1985), primary activities broadly align with direct costs and support activities broadly align with indirect costs — an analytical association used as a lens, not a strict accounting identity.
4. Break-even analysis — worked example (trainer-supplied, illustrative)
Break-even identifies the point where Revenue = Total Costs (fixed + variable):
Break-even quantity = Fixed Costs ÷ (Selling Price − Variable Cost per unit)
Suppose fixed costs are £40,000, the selling price is £25/unit and the variable cost is £15/unit. The contribution per unit is £25 − £15 = £10. Break-even = 40,000 ÷ 10 = 4,000 units. Below 4,000 units the activity makes a loss; above it, every unit contributes £10 of profit. Use this to test a business case: if forecast demand is only 3,000 units, the proposal does not break even and should be challenged. (Figures illustrative — they teach the method.)
5. Price analysis, TCO and whole-life costing (AC 1.2)
Purchase Cost Analysis (PCA) analyses the costs of things bought, enabling cost-reduction strategies and improving supplier relationships; for routine items simple price comparisons may be used instead. Price analysis (CIPS, 2019) compares the price paid against a price comparator (a 'benchmark of reasonableness') — past prices (price indexes), published prices (a catalogue price), pricing formulae (e.g. costs benchmarked at £175–£200 per metre, so 100 metres would cost £1,750–£2,000) and competitive bidding.
Total cost of ownership (TCO) incorporates, beyond the purchase price, "the present value of all costs associated with a product, service, or capital equipment that are incurred over its expected life" (Monczka et al., 2009) — transaction, finance, acquisition, operating, storage/handling/finishing, quality and end-of-life costs. Whole-life costing (WLC) is a structured 'cradle-to-grave' technique producing a spend profile over the product's lifespan. Four appraisal techniques used within TCO are the payback period, accounting rate of return, discounted cash flow (net present value) and internal rate of return.
Currency note: cost-estimation is commercial/analytical — no currency exclusion applies. Public-sector costing/value-for-money sits within the Procurement Act 2023 value basis. (PA-2023 framing trainer-supplied.)
§12 trap box: (1) TCO ≠ purchase price — it includes transaction, finance, acquisition, operating, storage, quality and end-of-life costs. (2) Direct costs are usually variable and indirect usually fixed — but not always (depreciation can be a direct fixed cost; energy an indirect variable cost). (3) Don't confuse cost analysis (what an item should cost) with price analysis (benchmarking the price actually quoted).