After factoring in licensing and all that what is the most cost effective way of setting up a SharePoint 2013 dev environment for 4-7 developers. We are considering buying desktops and putting a vm on each on with the dev environment set up on there or potentially upgrading a VM server to accomodate all the extra ram needed. Licensing seems expensive. Is getting the Ultimate MSDN the best option there? What about Office 365 or azure, will these suit our needs?
Yes, MSDN is the most cost effective way to get all you need to SharePoint 2013 development. You do not need Ultimate, as Premium subscription will do.
Couple of notes:
Investigate becoming a Microsoft (development) partner. A lot of the software you require will then be included for an annual fee.
This will also put you on Microsoft's radar for possible marketing and other such support from your local Microsoft office if you intend to create software to on-sell to new or existing Microsoft customers - especially if that software sale will help them sell their licenses.
Also included (depending on level of subscription or competencies obtained):