New information can be considered valuable in terms of decision making. From new information, the derivation of new and more applicable strategies can be utilized. In this paper, an analysis on how does new information becomes a valuable asset to transform Westmount Retirement home struggles with its current accounting system which affects its profitability to a more effective Activity-based costing system that can improve overall business operations. This paper outlined both the strengths and limitation of the current cost system by Westmount and at the same time provided new elements that support the proposed Activity-based costing system and its benefits.
The study also showed calculated suggested new price rates on the room options for Westmount’s current and potential residents together with its proposed new fees for additional services and medical needs.
A 125 Unit retirement residence was established on the year 1997. It was called Westmount Retirement home. The core purpose of this retiring home is to cater to seniors of the community. Westmount Retirement home provides both assisted living and independent supportive living options to their clients. Their current clients are divided into two segments, one is the independent supportive residents which require no assistance with the tasks of daily living, the other are assisted living residents which basically requires additional assistance which varies depending with their medical needs and degree of frailties.There are thirty-one (31) employees on Westmount that is spread across all of the retirement’s home several departments. There is basically several staff employed on a department that specializes on recreational activities, housekeeping, management, building maintenance and nursing.
With regard to prices offered to Westmount’s residents, the pricing model is actually simple and uniform for all residents and the only variance or difference is fundamentally based on the size of each room. In this study, the author will dissect the case by providing a discussion on Westmount’s poor financial results in 2005; this will be followed by analyzing the company’s current costing model by highlighting its strengths and limitations. Next will be a computation of the new cost per patient using the data of the current pricing model to create a new costing system. And finally, a discussion on how valuable new information can assist Westmount into creating a more suitable pricing scheme on its residents.
Statement of the Problem
Westmount Retirement Home has been struggling due to low profitability of its business operations as well as its current accounting system (Shomair 2008). From the low profitability standpoint, Westmount has faced stiff competition, among other local key players on their industry. Westmount has currently three main competitors namely: Chelsea Park retirement, Central park lodge and Longworth Retirement residence. Heavy competition arose due to the increasing demand for assisted and supportive living options. Thus, due to the availability of several retirement homes, key industry trends shows that a lot of potential residents are basing their decisions on residence options on the factor of cost.
Regarding Westmount’s current pricing model and accounting system, the company offers a standard rate (price) on numerous services to various patients and at the same time attending to individuals’ specific needs. The issue here is that there is no system or a defined activity-based costing (Platt and Vaysman 2000) in place to account for those varying service needs required by different residents. The obvious result here is a low profitability which can be attributed to its high operating expense.
Westmount’s Current pricing model: Strengths and Limitations
Based on industry trends, a lot of potential residents are focusing on the cost factor on deciding which retirement home they will get into. Westmount Retirement Homes offers a very attractive and competitive pricing package by having a basic and standard pricing scheme in which the only difference in prices are from room sizes and not other care services. This has attracted a number of residents to Westmount.
Not only does Westmount have a uniform price rate across all their services, it also has the most affordable prices compared to its competitors.
Westmount’s Package or Deal Pricing or most commonly known as a Bundled Payment (Miller 2008) provides its target market a hassle free approach on understanding the total cost of being a resident.
The current costing system of Westmount does not provide any valuable information more particularly on the cost of each their services, since the only method of differentiation with their costs are on room sizes.
Potential variability in costs especially on specific services in relation to clients’ needs is disregarded, due to the limitation of the current costing model.
Substantial revenue can be lost as well with this model. As an example, , resident couples can stay at their rooms with no additional cost and have the same care and services as long as they pay for the room rate only.
The current costing system does not provide any avenue or room for improvement specifically on operating expenses. For example a lot of staff hours are still being paid even without services rendered.
New Costing Model Design
This new cost model will definitely improve not only the current accounting system of Westmount but its overall profitability as well. The benefits of an Activity-based costing is that instead of costs assigned to fixed costs, are now can be utilized as variable costs depending numerous activity cost pools in Westmount (Weygandt, Kimmel, Kieso 2009).In essence, it controls the company’s overhead costs and leads to a more effective decision making by the management on how to improve overall finances.
A new rate will be reflected on this new costing model. To acquire a more suitable and competitive rate for Westmount, New room rates will be the computed by getting the average cost per room of all the three main competitors (see Exhibit 1). The average cost per room will provide an essential perspective on how much does the competitors charge per room (studio, one bedroom and two bedroom models) in this type of industry. Also, it can be used as the new room rate for Westmount. The purpose of which is for the discerning buyer would not only look at the room prices but also other features: such as quality of services, facilities etc. This is possible since the difference between the New Westmount prices compared to its competitors are relatively insignificant, in fact the new rate on average is cheaper than the other two competitors (Central and Longworth). Except for Chelsea Park in which Westmount can compete via other methods: for e.g. Marketing high quality services and facilities.
Price differences because of room size will still be applicable with the new rates. Regarding the current issue with having couples share the room and services, Westmount can utilize their two bedroom units. Only one competitor has this residential type (Chelsea Park). Westmount can have the option of selling those units to couples with the new room rate without an additional charge. This will provide Westmount the ability to attract more potential residents and have those clients focus on getting a two bedroom if they want to consider being with their spouses.
With these new rates alone, Westmount can generate more revenue out of its projected client base of 160 residents and in effect will increase profitability.
Identifying and Matching Residents’ Needs
Each resident may have different or special needs, contrary to the previous system in which these differences are barely nonexistent. This can be done by Westmount using proper segmentation of all its current residents, more particularly to those residents require additional services or different levels of care. This can be segmented by using a three modelled option for service fees. First are the residents with no medical needs, then with moderate medical needs and lastly those with intense medical needs, for the last two groups, they could have the option to purchase nursing and medical support at an additional cost. This also follows the activity-based costing model proposed for this company.
New Prices for Additional Services and Medical Needs
For those living residents with no medical needs rates, the new room costs will be the base price to be applied. On the other hand, those on the other group which require added services and medical needs would pay additional costs for each service and medical need (see Exhibit 2 for Activity-Based costing) The price of each service will be determinant to its operating cost plus 15% mark-up, to ensure adequate return to Westmount’s shareholders and enough funds for necessary capital requirements.
Utilization of Labor Availability
“As in any organization, some employees are more productive than others” (Platt, and Vaysman 2000:19). With this new model the author allocated cost of each staff member’s compensation-related costs among the several activities in which he or she is responsible. Since a lot of man-hours are consistently wasted with the current costing system, the new system approach would be almost the exact opposite.
Each resident group will now have staff available to them only when they really need them. Examples of these are dieticians employed for those patients with serious medical conditions; their hours now will be spent entirely to this resident group, in effect decreasing their total work time. And since they will now be paid on an hourly basis it will drive down costs on this support service. These hourly basis of work schedules will be applied across the board to ensure that all time spent will be productive and useful. This is also a win-win suggestion especially the extra time given to these staff members will create a much more balance in their work-life relationship. As for Westmount, obviously this will help drive down operating costs, by eliminating its current fixed costs of labour and transforming it into a variable costs which can either be seasonal depending on the demand for staff availability.
Value of New information
In any facet of economics most particularly in enterprise, new information that can be used to apply new strategy and other development are all considered essential and valuable. Cohen and Leviathan stated that “The ability to exploit external knowledge is thus a critical component of innovative capabilities” (1990:122). In this case, Westmount’s administrator Helen Roswell, have noticed the low profitability of the firm and analyze what could be the causes. She acknowledges external factors could contribute to it, but her main concern was on their pricing model and total operating expenditure. This realization made Roswell think of other alternatives apart from the current cost model, especially when this current model has a direct impact on the firm’s overall profitability. To continue to attract more clients and still remain profitable, a new pricing model was needed to reflect the level of medical care and service required by each individual patient. Roswell has also decided that she would need to assess the true cost of each Westmount’s services, and then use this information to develop a new pricing model.
The price schemed for room rates specifically as aforementioned in this study will be the monthly average price of all industry players. The added or special service or medical need will be on a case to case basis in which the price will be service operational cost plus 15% mark up. This new pricing scheme can definitely alleviate Westmount’s overall profitability and decrease operational expenses.
As an example for Supportive Services:
Number of Employees:17
Total Cost amounted to $548, 573.
Total wages is at $538, 392
Total Supplies used cost $10,181
Two (2) dieticians is compensated $18.50/hour each. 37 hours/week – 48 weeks – Total costs for Dieticians Wages per year: $65, 712
Estimated. Number of residents with intense medical need for dieticians – 50.The total cost of the two dieticians’ wages for this scenario will now be allocated on an hourly basis or 25% allocation example, in which the demand for their services ( in this case the 50 residents) will be applied.