New information can be considered valuable in footings of determination devising. From new information, the derivation of new and more applicable schemes can be utilized.
In this paper, an analysis on how does new information becomes a valuable plus to transform Westmount Retirement place struggles with its current accounting system which affects its profitableness to a more effectual Activity-based costing system that can better overall concern operations. This paper outlined both the strengths and restriction of the current cost system by Westmount and at the same clip provided new elements that support the proposed Activity-based costing system and its benefits.
The survey besides showed calculated suggested new monetary value rates on the room options for Westmount ‘s current and possible occupants together with its proposed new fees for extra services and medical demands.
A 125 Unit retirement abode was established on the twelvemonth 1997.
It was called Westmount Retirement place. The nucleus intent of this retiring place is to provide to seniors of the community.
Westmount Retirement place provides both aided life and independent supportive life options to their clients. Their current clients are divided into two sections, one is the independent supportive occupants which require no aid with the undertakings of day-to-day life, the other are assisted life occupants which fundamentally requires extra aid which varies depending with their medical demands and grade of frailties.
There are 31 ( 31 ) employees on Westmount that is spread across all of the retirement ‘s place several sections. There is fundamentally several staff employed on a section that specializes on recreational activities, housework, direction, constructing care and nursing.With respect to monetary values offered to Westmount ‘s occupants, the pricing theoretical account is really simple and unvarying for all occupants and the lone discrepancy or difference is basically based on the size of each room. In this survey, the writer will dissect the instance by supplying a treatment on Westmount ‘s hapless fiscal consequences in 2005 ; this will be followed by analysing the company ‘s current bing theoretical account by foregrounding its strengths and restrictions.
Next will be a calculation of the new cost per patient utilizing the information of the current pricing theoretical account to make a new costing system. And eventually, a treatment on how valuable new information can help Westmount into making a more suited pricing strategy on its occupants.
Statement of the Problem
Westmount Retirement Home has been fighting due to low profitableness of its concern operations every bit good as its current accounting system ( Shomair 2008 ) . From the low profitableness point of view, Westmount has faced stiff competition, among other local key participants on their industry.
Westmount has presently three chief rivals viz. : Chelsea Park retirement, Central park Lodge and Longworth Retirement abode. Heavy competition arose due to the increasing demand for aided and supportive life options. Therefore, due to the handiness of several retirement places, cardinal industry tendencies shows that a batch of possible occupants are establishing their determinations on abode options on the factor of cost.
Sing Westmount ‘s current pricing theoretical account and accounting system, the company offers a criterion rate ( monetary value ) on legion services to assorted patients and at the same clip go toing to persons ‘ specific demands. The issue here is that there is no system or a defined activity-based costing ( Platt and Vaysman 2000 ) in topographic point to account for those changing service demands required by different occupants. The obvious consequence here is a low profitableness which can be attributed to its high operating disbursal.
Westmount ‘s Current pricing theoretical account: Strengths and Restrictions
Based on industry tendencies, a batch of possible occupants are concentrating on the cost factor on make up one’s minding which retirement place they will acquire into.
Westmount Retirement Homes offers a really attractive and competitory pricing bundle by holding a basic and standard pricing strategy in which the lone difference in monetary values are from room sizes and non other attention services. This has attracted a figure of occupants to Westmount.Not merely does Westmount hold a unvarying monetary value rate across all their services, it besides has the most low-cost monetary values compared to its rivals.Westmount ‘s Package or Cover Pricing or most normally known as a Bundled Payment ( Miller 2008 ) provides its mark market a hassle free attack on understanding the entire cost of being a occupant.
The current costing system of Westmount does non supply any valuable information more peculiarly on the cost of each their services, since the lone method of distinction with their costs are on room sizes.Potential variableness in costs particularly on specific services in relation to clients ‘ demands is disregarded, due to the restriction of the current costing theoretical account.Significant gross can be lost every bit good with this theoretical account. As an illustration, , resident twosomes can remain at their suites with no extra cost and have the same attention and services every bit long as they pay for the room rate merely.
The current costing system does non supply any avenue or room for betterment specifically on operating disbursals. For illustration a batch of staff hours are still being paid even without services rendered.
New Costing Model Design
Activity-Based CostingThis new cost theoretical account will decidedly better non merely the current accounting system of Westmount but its overall profitableness every bit good. The benefits of an Activity-based costing is that alternatively of costs assigned to fixed costs, are now can be utilized as variable costs depending legion activity cost pools in Westmount ( Weygandt, Kimmel, Kieso 2009 ) .
In kernel, it controls the company ‘s operating expense costs and leads to a more effectual determination devising by the direction on how to better overall fundss.Room RatessA new rate will be reflected on this new bing theoretical account. To get a more suited and competitory rate for Westmount, New room rates will be the computed by acquiring the mean cost per room of all the three chief rivals ( see Exhibit 1 ) . The mean cost per room will supply an indispensable position on how much does the rivals charge per room ( studio, one sleeping room and two sleeping room theoretical accounts ) in this type of industry.
Besides, it can be used as the new room rate for Westmount. The intent of which is for the discerning purchaser would non merely look at the room monetary values but besides other characteristics: such as quality of services, installations etc. This is possible since the difference between the New Westmount monetary values compared to its rivals are comparatively undistinguished, in fact the new rate on norm is cheaper than the other two rivals ( Central and Longworth ) . Except for Chelsea Park in which Westmount can vie via other methods: for e.
g. Marketing high quality services and installations.Monetary value differences because of room size will still be applicable with the new rates. Sing the current issue with holding twosomes portion the room and services, Westmount can use their two sleeping room units.
Merely one rival has this residential type ( Chelsea Park ) . Westmount can hold the option of selling those units to twosomes with the new room rate without an extra charge. This will supply Westmount the ability to pull more possible occupants and have those clients focus on acquiring a two sleeping room if they want to see being with their partners.With these new rates entirely, Westmount can bring forth more gross out of its projected client base of 160 occupants and in consequence will increase profitableness.
Identifying and Matching Residents ‘ NeedsEach occupant may hold different or particular demands, reverse to the old system in which these differences are hardly nonexistent. This can be done by Westmount utilizing proper cleavage of all its current occupants, more peculiarly to those occupants require extra services or different degrees of attention. This can be segmented by utilizing a three modelled option for service fees. First are the occupants with no medical demands, so with moderate medical demands and in conclusion those with intense medical demands, for the last two groups, they could hold the option to buy nursing and medical support at an extra cost.
This besides follows the activity-based costing theoretical account proposed for this company.New Prices for Additional Services and Medical NeedsFor those living occupants with no medical needs rates, the new room costs will be the basal monetary value to be applied. On the other manus, those on the other group which require added services and medical demands would pay extra costs for each service and medical demand ( see Exhibit 2 for Activity-Based costing ) The monetary value of each service will be deciding to its operating cost plus 15 % mark-up, to guarantee equal return to Westmount ‘s stockholders and adequate financess for necessary capital demands.Use of Labor Availability“ As in any organisation, some employees are more productive than others ” ( Platt, and Vaysman 2000:19 ) .
With this new theoretical account the writer allocated cost of each staff member ‘s compensation-related costs among the several activities in which he or she is responsible. Since a batch of man-hours are systematically wasted with the current costing system, the new system attack would be about the exact antonym.Each occupant group will now hold staff available to them merely when they truly necessitate them. Examples of these are dietitians employed for those patients with serious medical conditions ; their hours now will be spent wholly to this occupant group, in consequence diminishing their entire work clip.
And since they will now be paid on an hourly footing it will drive down costs on this support service. These hourly footing of work agendas will be applied across the board to guarantee that all clip spent will be productive and utile. This is besides a win-win suggestion particularly the excess clip given to these staff members will make a much more balance in their work-life relationship. As for Westmount, evidently this will assist drive down operating costs, by extinguishing its current fixed costs of labor and transforming it into a variable costs which can either be seasonal depending on the demand for staff handiness.
Value of New information
In any aspect of economic sciences most peculiarly in endeavor, new information that can be used to use new scheme and other development are all considered indispensable and valuable. Cohen and Leviathan stated that “ The ability to work external cognition is therefore a critical constituent of advanced capablenesss ” ( 1990:122 ) . In this instance, Westmount ‘s decision maker Helen Roswell, have noticed the low profitableness of the house and analyse what could be the causes. She acknowledges external factors could lend to it, but her chief concern was on their pricing theoretical account and entire operating outgo.
This realisation made Roswell think of other options apart from the current cost theoretical account, particularly when this current theoretical account has a direct impact on the house ‘s overall profitableness. To go on to pull more clients and still stay profitable, a new pricing theoretical account was needed to reflect the degree of medical attention and service required by each single patient. Roswell has besides decided that she would necessitate to measure the true cost of each Westmount ‘s services, and so utilize this information to develop a new pricing theoretical account.The monetary value schemed for room rates specifically as aforementioned in this survey will be the monthly mean monetary value of all industry participants.
The added or particular service or medical demand will be on a instance to instance footing in which the monetary value will be service operational cost plus 15 % grade up. This new pricing strategy can decidedly relieve Westmount ‘s overall profitableness and lessening operational disbursals.Calculations:As an illustration for Supportive Services:Number of Employees:17Entire Cost amounted to $ 548, 573.Entire rewards is at $ 538, 392Entire Supplies used cost $ 10,181Two ( 2 ) dietitians is remunerated $ 18.
50/hour each. 37 hours/week – 48 hebdomads – Sum costs for Dieticians Wages per twelvemonth: $ 65, 712Estimated. Number of occupants with intense medical demand for dietitians – 50.The entire cost of the two dietitians ‘ rewards for this scenario will now be allocated on an hourly footing or 25 % allotment illustration, in which the demand for their services ( in this instance the 50 occupants ) will be applied.
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