Financial Management Midterm Assessment Westmount Retirement Residence Case. Table of Contents / List of Exhibits Executive Summary of my Conclusions:3 Present System:3 Recommended System:3 Recommendation 1:3 Recommendation 2:3 Main Report:4 – Question 14 – Question 24 – Question 35 – Question 45 Exhibits7 Exhibit 1:7 Exhibit 2:7 Exhibit 4:8 Exhibit: 58 Exhibit: 69 Exhibit: 710 Exhibit :813 References /Bibliography15 Executive Summary of my Conclusions: Present System: The Westmount Retirement Residence (WRR) is calculating the cost per resident by dividing the total costs by number of residents.
This number is then multiplied by inflation of 5 to 8 percent to bring the estimated costs for the coming year. This is the base cost for Studio apartments, and then the cost for the one bed room and two bed rooms are calculated by adding 25 % and 50% on the base cost. So there was no system to calculate the varying service need required by different residents. The net profit in year 2005 is 2. 28%, very low net profit looking at the markets of the same industries. (See Exhibit 1) Recommended System: In the present system, all costs are considered as “fixed costs”.
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I feel, the costing can be done on activity based costing (ABC) (Eddie McLaney, Peter Atrill, 2010::400) (here in this case it is service based, need based). for Support services. Food services, Laundry service can be done by direct costing (variable costing) depends on the consumption of the resident, but this may take again a lot of expenditure to maintains individual costing and billing. Activity- based pricing (ABP) is a pricing method that combines market research data with cost accounting information to establish prices for products and services that result in designed profits . internet resources) Recommendation 1: The net profit must be at least 15% as net profits in the hospitality or caretaking industry in the market is around 15-25 %. With the future of this industry is growing, and a more than decade well established WRR can make more than 15% net profits by calculating the right costs per the resident. I recommend calculating ad dividing the cost as below. 1) 100% of the total costs of the Food services, Laundry, Recreation, facility, Housekeeping, General Admin, Fixed operative expenses, Management fees, Reserve assessment placement should be applied divided by the room size. ) The costs of support service (Nursing care service, Dietician, Attendant care) should be applied on hourly basis for three divided groups on the demands of their needs. Then add a calculated inflation (around 8% inflation) (add 2% more than government declared inflation) and mark-up of 18% on the costs to get a 15% of net profit. The calculations are as shown in exhibit 7. Recommendation 2: I recommend calculating ad dividing the cost as below. ) 50% of the total costs of the Laundry, Recreation, facility, Housekeeping, General Admin, Fixed operative expenses, Management fees, Reserve assessment placement should be applied to all residents regardless of the care needs or room size. 2) Remain 50% of the above costs should be applied based on the suite size or square footage. This will also take care if couple is sharing the single bed room 3) The costs of support service (Nursing care service, Dietician, Attendant care) should be applied on hourly basis for three divided groups on the demands of their needs.
Then add a calculated inflation (around 8% inflation) (add 2% more than government declared inflation) and mark-up of 18% on the costs to get a 15% of net profit. The calculations are as shown in exhibit 8. Main Report: As explained in my recommendations above, we must build a full transparent costing model to know the exact pricing. There are many costs which can’t be taken as fixed costs and dividing to each and every one. The supportive, food, laundry services must be variable and charged to the residents on their usage than equally distributing.
But at the same time one must keep in mind that how much it will cost follow about the consumption by each resident. As we see in this example, food service, supportive services are around 43% of the total costs, so we can maintain accounts for each resident for these services, at the same time, laundry services are only 3. 74% of the total costs, and it is not advisable to maintain laundry costs for each resident, which may cost more. I couldn’t find the consumption table by various residents for food services as we found for support services (depends on medical care). – Question 1
Evaluate the strengths and limitations of the current costing model at Westmount. Concerns: 1) Low profitability 2) Current costing & accounting system 3) Future success 4) Competition may increase Strengths: 1) High occupancy rate. 2) Easy to calculate the costs. 3) Stable clientele as fee is not varying according to the present needs or if needs changes in future. 4) Low fee /resident compare with competitors. 5) There is no burden on the residents even though they demand different needs and service Limitations: 1) No price different for different services and needs ) No checks on the costing 3) There is no way to pass the various service costs to the residents 4) Residents with high needs / services are benefited a lot. 5) Due above limitation, normally the high need residents will join and in turn will result more losses – Question 2 Explain Westmount’s poor results in 2005 By looking at the balance sheet (See Exhibit 1) and net profit (2. 2%) the results are very poor compare to the same type of (Hospitality, caring) industry. All costs are considered as fixed and divided by the number residents, and estimated the cost per resident.
To keep the variation between Studio, one bed room , 2 bed room residents used a simple formula of 25% and 50% increase compare to the Studio residents costs. In this model, the costs are not clearly divided on the basis of the needs, services, room size. The more benefited residents are with high medical needs as they are paying the same as with less medical needs. The food services, Support services which consists of 43% of the total cost must be properly accountable to the residents depends on the services taken by them. Question 3 Using the cost information in Exhibit 4 design a new costing system, taking into account the three suite options and the three levels of required patient care. What is the new cost per patient under each of the options? The costs are as shown in the below table. The costs are calculated for 125 rooms (75 of Studio suites, 35 of One- bed room suites, 15 of Two- bed room suites) with 160 residents (55 residents with “No Medical Needs” , 65 residents with “Medium Medical Needs”, 40 residents with High Medical Needs).
The tables in exhibit 5 and 6 are used for calculations. The detail calculations are available at exhibit 7 [pic] The above costs are calculated as per the below distribution [pic] – Question 4 How useful is this new information to Roswell for pricing purposes? What prices should Roswell recommend be charged for the various suite options and for the various levels of required patient care? The new information on the supportive service is very useful to calculate the costs based on service provided to the residents.
As I mentioned in my recommendations there are two options for pricing, I prefer to go with recomendation1 As per my recommendation 1 pricing per month. A detailed calculation note can be seen at Exhibit 7 [pic] As per my recommendation 2 pricing per month. A detailed calculation note can be seen at Exhibit 8 [pic] Exhibits Exhibit 1: [pic] Exhibit 2: [pic] Exhibit 4: [pic] Exhibit: 5 [pic] Exhibit: 6 [pic] [pic] [pic] Exhibit: 7 [pic] [pic] [pic] [pic] [pic] [pic] [pic] [pic] Exhibit :8 [pic] From Exhibit 7, we bring the costs of Supportive services pic] [pic] References /Bibliography Books Eddie McLaney, Peter Atrill, (2010), Accounting An Introduction, 5th ed. USA: Prentice Hall. Internet Resources http://www. hotelmule. com/hospitality_travel_wiki/wiki/Activity%20based%20pricing [accessed on Friday 19th Feb 2011] I affirm that the attached work is entirely my own, except where the words or ideas of other writers are specifically acknowledged according to accepted citation conventions. This assignment has not been submitted for any other course at Robert Kennedy College or any other institution.
I have revised, edited and proof-read this paper. CERTIFICATION OF AUTHORSHIP I certify that I am the author of this paper and that any assistance I received in its preparation is fully acknowledged and fully disclosed in this assignment/paper/examination. I have also cited any sources (footnotes or endnotes) from which I used data, ideas, theories, or words, whether quoted directly or paraphrased. I further acknowledge that this written work has been prepared by me specifically for this course. (19 Feb 2011)