Westmount Retirement Residence - Case Study Example

Running Head: Westmount Retirement Residence Report University: Course: Tutor: Date of Submission: Table of contents 1.0 Executive Summary………………………………………………………………3-4 2.0. Strengths of the current Westmount costing model …………………………….4-5 3.0. Limitations of the current Westmount costing model……………………………5-6 4.0. Explanation of Westmount poor results in 2005…………………………………..6 5.0 The new cost system which should be adopted……………………………………7-9 6.0. How useful is this information to Roswell for pricing purposes……………….....9-10 7.0. Lists of Exhibits………………………………………………………………….11-12 8.0. References………………………………………………………………………….13 1.0 Executive Summary Westmount Retirement Residence was established in 1997 as a 125-unit retirement residence and ever since it has been using a simple pricing strategy which over the years has not yielded good returns as far as the organization services are concerned. In order to remain more competitive and attract more customer’s as well as remain profitable, a new pricing model which reflects the level of medical care and service required by each individual patient was required (Jaggar & Ross,2002,pp.45-65). A cost model which takes into consideration all these facts was required to be implemented by Westmount Retirement Residence. To effectively develop a proper cost model for Westmount Retirement Residence then it was important to analyze the current cost model as well as pricing model to determine a model which truly assesses the true cost of each of Westmount services. This report therefore gives a clear summary on the strengths as well as limitations of the current Westmount Retirement Residence cost model. It makes a thorough analysis of the cost model in relation to various departments as well as services offered as evidenced from the case. From the analysis it is quiet clear that though Westmount Retirement Residence, offers various services to different kinds of residents who have various needs, the current pricing model does not take this into consideration rather the cost per resident is charged according to the room size, despite the services an individual is receiving. This so far has been affecting the profitability of the organization since under the current Westmount cost model it is hard to individualize the costs basing only on the room size as well as level of care. After analyzing, the strengths as well as limitations of the current cost model, the report tabulates reasons for the poor performance in the year 2005.Additionally, the report suggest a new cost model to be implemented by Westmount Retirement Residence through the use of cost information in Exhibit 4 by taking into account the three suite options as well as the three levels of required patient care. Furthermore, the report tabulates a new cost per patient which should be charged by Westmount Retirement Residence under each of the three options provided. Finally, the report gives a summary of how the new cost information will be of value to Roswell as far as service pricing is concerned. In conclusion the report actually gives recommendations regarding which prices should Roswell charge for various suite options and for the various levels of required patient care. 2.0. Strengths of the current Westmount costing model The current costing model used by Westmount Retirement has several strengths as well as limitations. To begin with, under the current costing model of Westmount Retirement costs have been categorized into six departments which consists of food service, support services, laundry, recreation, facility and housekeeping which actually is one of the strengths associated with the current Westmount costing model as shown in Exhibit 3 and 4 . Since this costing model assigns costs to various departments it creates room for Westmount to easily monitor wages, benefits, supplies , traceable costs as well as other overhead expenses for each department which is perceived to be a straight forward way of accounting for any costs in any organization. When costs are assigned to various departments it creates more accountability as well as transparency as far as organizational funds are concerned since the responsibility lies entirely on the department making the process of monitoring expenses as well as costs in relation to benefits easier. Assigning costs to various departments makes the process of decision making process easier hence eliminating any instances of over spending on certain departments as far as departmental benefits are concerned. Secondly, the current Westmount costing model provides room for all other fixed costs that could not be assigned appropriately to other departments such as insurance and property tax to be classified under fixed operating expenses as shown in Exhibit 4. Additionally, under this costing model General and administrative expenses, management fees as well as fixed operating expenses are allocated equally to the six departments as overhead costs. This cost model moreover, makes it easier for Westmount to determine residents’ monthly fees without many hassles by only dividing the total cost by the number of residents which in turn assists in determining total cost per resident. 3.0. Limitations of the current Westmount costing model Though, the current cost model being used by Westmount proves to be a more appropriate cost allocation model as far as determining departmental costs as well as residents costs are concerned, it is associated with several limitations which have been seen as major contributions towards Westmount low profitability over the recent years. First and foremost, the current Westmount cost model does not account for the varying service needs required by different residents rather the cost price per resident is the same despite the services the resident is receiving. Though, the current Westmount cost model allocates overhead costs more evenly among the six departments as shown in Exhibit 4, some departments are much more smaller than others both in terms of square footage as well as number of employees required per department. This equally implies that allocating overhead costs evenly across all six departments is not appropriate due to the size as well as services offered per department. Allocating overhead heads more evenly among departments under the current Westmount cost model is not appropriate hence a fundamental limitation as far as this model is concerned. This is attributed to the mere fact that overhead costs associated to smaller departments may not be necessary making it even harder for Westmount to actually determine the exact cost per resident as services vary depending on the department size. Though, the current cost model provides a room for Westmount to perfectly differentiate costs per resident based on the room size, this system is consistent. This is stipulated by the mere fact that room size actually acts as basic factor under the current cost system for Westmount as far as determining patient cost is concerned. This therefore, makes it is more difficult to individualize the cost per patient under the current Westmount cost model basing on room size and patient level of care. Westmount current cost model assumes a flat rate multiplier of 25% and 50% for patients allocated in larger suites as well as who uses 25% to 50% more of all the services being offered by Westmount Retirement. Though, this is the case this assumption is totally wrong as Westmount cost model does not differentiate the costs between the residents in larger suites as well as those in studio apartments. The Westmount cost model assumes that residents in larger suites don’t use the food services as well as laundry services in excess as compared to the patients in studio apartments which actually is not the case since residents in larger suites utilize utilities, amenities as well as other maintenance services to a greater extent than those in the studio apartment. Under the current Westmount cost model, it is hard to allocate costs especially those derived from the nursing and dietician staff. Additionally, under the current Westmount cost model the cost of nursing care is distributed evenly across all residents despite the fact that some residents of Westmount retirement actually use utilize their services more frequently while other residents do not utilize their services at all. This a limitation n as far as this model is concerned since it is necessary that the costs be differentiated among the residents in a manner that those who use the nursing care services should pay more than those who use the services less frequently. 4.0. Explanation of Westmount poor results in 2005 The poor results in the year 2005 were attributed with the poor pricing system used by Westmount Retirement in terms of determining the cost per resident relative to the services being offered. Westmount cost price per resident was solely based on room size and not the services the residents were receiving. Since the cost price was solely based on the room size Westmount Retirement Residence had problems with clearly determining how much each of the services they offered were costing them since they used a simple pricing model which essentially charged each resident the same price per month regardless of their needs hence contributing to low profitability as well as poor results in the year 2005. 5.0. The new cost system which should be adopted According to research, an organizational cost system plays a crucial role in any organization since they generate important information as far as organizational decision making process is concerned (Skitmore & Vernon,2005,pp.12-45). Individual cost systems are usually used to gauge organizational performance as well as product or service pricing hence it is necessary that various factors be factored when designing a specific organizational cost model (Charles,2006,pp.46). In order to create an improved cost system for Westmount Retirement Residence it will be necessary that the current pricing system be evaluated. To achieve better results and high profits then, it is necessary that Westmount adopts a cost model which actually considers price cost for each department. When it comes to the resident’s monthly fees it should be obtained by dividing the total cost by the number of residents after which is multiplied by a certain number to account for inflation for the coming year as well as adjusted to account for the size of suite rented by the resident. The monthly fees should be charged to all the residents despite all the services they are receiving it should be charged on all the residents on a flat rate. The base figure should reflect the cost of a studio apartment in a manner that the price for a one- bedroom suite should be determined by adding a multiplier of 30 per cent to the base figure which should be 30% larger than a studio apartment. The cost of a two bedroom suite should be the base figure obtained plus a multiplier of 60 per cent, based on its square footage and this cost should be much higher than that of the studio apartment. Since the three of the suites have different services, it is important that the residents pay different prices for various services offered by Westmount Retirement residence. Westmount new cost model Expected Number of Residents in a year 160 (5% Inflation) Monthly residents fees = total cost x % inflation Number of residents Total cost by department is =$2,465,999 x 0.5 160 Monthly resident fees=$ 7706.25 Cost price of a studio apartment per resident/year = base figure= $15,412.49 One- bedroom suite price per resident/year=base figurex130% 100 =$15,412.49x130% 100 Resident cost price/year = $ 20036.237 Two-bedroom Cost = (base x 1.60%)/year $ $ 20036.237x160% 100 = $32057.98 6.0. How useful is this information to Roswell for pricing purposes This information is more crucial to Roswell since it will help Westmount Retirement Residence in determining cost per resident according to the room size as well as level of patient care the residents are actually receiving taking into account the three suites of Westmount Retirement Residence. Analyzing expenses as well as tracing overhead costs per department is more important given the mere fact that some departments are bigger in terms of footage it will help Roswell in establishing exact overhead costs per department rather than distributing it more evenly hence cutting on some expenses as far as some departments are concerned. In terms of various levels of patients care some residents utilize more services frequently specifically those with serious medical conditions such as diabetes hence they rely upon these services quite heavily than other residents who never utilize the services. Costs therefore should be allocated appropriately among the residents to specifically reflect on the resident’s medical services. The residents should be divided into three groups thus those with no medical needs, those with moderate medical needs as well as those with intense medical needs. Costs should therefore be allocated on an hourly basis for each resident group according to the services being offered. Wages should be allocated on hourly basis too which also should incorporate the Nurses and dieticians used supplies, materials, and administrative services as well. All this costs should be calculated on hourly basis. In addition to costs, a 15per cent profit margin needed to be built into the resident fees to ensure both an adequate return to Westmount’s shareholders and sufficient funds for necessary capital replacements. Since some residents shared one-bedroom suites with their spouse while others resided in a one-bedroom suite alone it is necessary spouses residing in a one-bedroom should be charged differently compared to those sharing. Cost price per patient according to resident’s patient care Patient Classifications # of Residents Hours of Nursing Supervision Care per Resident per Week Hours of Dietician Care per Resident per Week Hours of Attendant Care per Resident per Week Cost price per resident on hourly basis Cost price per resident on weekly basis No Medical Needs 55 0.25 0.1 1.3 $100 $ 130 Medium Medical Needs 65 1.5 0.4 3 $ 200 $ 600 High Medical Needs 40 2.5 0.9 4.75 $300 $ 1425 Total per week $ 2155 7.0 List of Exhibits Exhibit 4 WESTMOUNT RETIREMENT RESIDENCE EXPENSES FOR 2005, BY DEPARTMENT Department Sq. Ft. # Emp. Wages & Benefits Supplies Other Total Food Service 6,100 3 $257,671 $252,497 $510,168 Supportive Services 10,200 17 538,392 10,181 548,573 Laundry 4,500 2 77,972 6,109 $8,145 92,226 Recreation 35,400 2 32,303 10,181 42,484 Facility 56,500 2 37,872 8,195 160,116 206,183 Housekeeping 3,200 3 107,053 8,145 115,198 Subtotal 115,900 29 1,051,263 295,308 168,261 1,514,832 Overhead Costs General and Admin 3,500 2 149,283 11,032 280,574 440,889 Fixed Operating Expenses 241,585 241,585 Management Fees 217,804 217,804 Reserve Asset Placement 50,889 50,889 Total 119,400 31 $1,418,350 $357,229 $690,420 $2,465,999 Exhibit 6 VARYING DEGREES OF REQUIRED PATIENT CARE AT WESTMOUNT RETIREMENT RESIDENCE Patient Classifications # of Residents Hours of Nursing Supervision Care per Resident per Week Hours of Dietician Care per Resident per Week Hours of Attendant Care per Resident per Week No Medical Needs 55 0.25 0.1 1.3 Medium Medical Needs 65 1.5 0.4 3 High Medical Needs 40 2.5 0.9 4.75 8.0. References Charles, M (2006).A cost model for bikeways: volume 1, cost model development.Publisher:Virginia. Hampton Roads Planning District Commission, pp.46 Jaggar, D & Ross, A (2002).Building Design Cost Management.Publisher: Wiley-Blackwell, pp.45-65 Skitmore, R, M & Vernon, M (2005).Cost modeling.Publisher: Taylor & Francis, pp.12- 45 Read More