The Current Costing Model Has Both Strengths And Weaknesses Accounting Essay

Executive Summary

Westmount Retirement Residence is involved in giving elderly people in London a abode where they have comfort, nutrient services, laundry services and round the clock medical services among other things. It mostly concentrates on the aged who are largely around the age bracket of 75 old ages. Helen Roswell who is the decision maker of Westmount Retirement Residence is of the sentiment that the recent diminution in profitableness is mostly attributable to the current costing system. Westmount needs to alter its bing attack to reflect alterations in the industry and to go competitory.

Among the strengths of the current costing system are its simpleness and its ability to split costs among the different sections. Its failings include equal distribution of all disbursals among all the sections irrespective of the size of these sections. The biggest failing is that the current costing attack does non impute costs to the clients but instead divides the entire cost among all the clients irrespective of the ingestion by each.

Westmount performed ill in 2005 because of increased competition. Westmount ‘s bing attack is unequal because it does non capture costs accurately taking to take down net incomes.

The new costing system will apportion costs based on the suits available at Westmount and the classs of patients based on their medical demands. All costs, but for supportive costs, will be allocated on the footing of suit size as a per centum of the entire country in square pess. Supportive costs on the other manus will be allocated as a per centum of the cost of engaging nurse supervisors, nurse attenders and nurse dietitians taking into consideration the sum of these services consumed by each client. This analysis helps in geting at the new cost per patient under each option. This information will be utile to Roswell in geting at a decently computed base cost and puting a pricing construction that will enable Westmount to achieve the much desired 15 % border and profitableness as a whole.

Strengths and Restrictions of the current costing theoretical account

The current costing theoretical account has both strengths and failings. Among its strengths is its simpleness in geting at the unit cost. It is nevertheless non sufficiently comprehensive. This leads to inaccuracies in bing. Second, the current costing method attributes costs into the several sections. This ensures that the costs are good distributed across all the functional countries and is good in tracking the costs incurred by each section. For case, from the studies created utilizing this costing attack, we can determine that supportive services section incurs the most cost which is as a consequence of rewards and benefits. This is followed by the nutrient service section where the cost is divided about every bit between rewards and supplies.

The failings of the current costing system include its equal distribution of the general disposal disbursals, direction fees and fixed operating disbursals. This can besides be referred to as the soaking up bing method. The soaking up bing method includes both the variable costs every bit good as the fixed operating expense costs in each merchandise. This is used in apportioning costs to the sections. However, these sections are non equal both in footings of their country in square pess or the figure of employees present in each section. As such, these disbursals, alternatively of being apportioned every bit, should be apportioned harmonizing to the country or the figure of employees or both ( Jamal, Mastor, Saat, Ahmed, & A ; Abdulla, 2007 ) .

The 2nd failing with the current costing theoretical account is the fact that it does non capture the existent cost incurred by each of the place ‘s dweller. It is obvious that some of Westmount ‘s occupants use some services more than others. For case, the supportive services which represent the highest costs are classified into occupants necessitating no medical demands, medium medical demands and high medical demands. This attack does non comprehensively capture the kernel of bing which is imputing the entire costs in the production of a good or a service. A more luxuriant costing theoretical account should be developed to capture these changing demands among the occupants and develop a corresponding pricing theoretical account ( Murthy & A ; Gurusamy, 2009 ) .

Westmount ‘s hapless consequences in 2005

Westmount performed drearily in 2005 as a consequence of a figure of factors. First of all, competition increased dramatically between the old ages. Over 17 retirement places exist in the London country entirely. This has increased competition which in bend has eroded the pricing power. Competition shifted towards the monetary value factor doing it progressively hard for Westmount to monetary value their merchandises at a premium and therefore accomplish the needed degree of return to prolong growing and protect their grosss ( Schomair, 2008 ) .

Second, pricing extremely is sensitive as their clientele comprise of persons over the age of 75 are persons with mean incomes of between 25,000 dollars and 40,000 dollars. This places a cap on the degree of monetary values that Westmount can establish. This is despite of lifting cost of life. For case, the cost of nutrient and supportive services is really high. This requires an addition in monetary values to keep the borders. However this is non possible because excessively high an addition can non be born by the clients because of their limited incomes ( Schomair, 2008 ) .

Westmount ‘s costing system besides posses an internal menace. This is because the costing is non based on use but instead takes a unvarying attack. All costs at Westmount are divided among the patronages every bit without consideration of each client ‘s single ingestion. Some of the clients even portion suites with their partners yet this does non ensue in excess monetary values for them. Such cases increase the cost of nutrient and other societal comfortss. The bing attack should be re-evaluated to take these facts into consideration.

New bing system

The three suites are Studio, one sleeping room and two sleeping rooms. The studio room measures 400 square pess, the one sleeping rooms step 500 square pess while the two sleeping room step 600 square pess. The entire suites are 125. This can be represented in an excel sheet as shown:

Suites

No. of Suites

Size ( Sq. Feet )

Percentage ( % ) Sq. Foot

Studio

75

400

26.67

One B/Room

35

500

33.33

Two B/Room

15

600

40.00

Entire

125

A

100.00

The per centums have been arrived at based on the difference in the sizes of the different suites. This will organize the new footing for bing based on the room sizes as opposed to the traditional method of arbitrary adding 0.25 and 0.5 per centum to the base cost. This will be used to apportion costs staying after supportive services have been allocated. This costs entire to $ 1,917,426 per twelvemonth ( $ 2,465,999- $ 548,573 ) . This allotment is illustrated in the excel sheet below:

Actual Staying Cost Share in ( $ ) per Year

Suites

Percentage ( % )

Cost Amount ( $ ) /Yr

Cost Amount ( $ ) /Yr/Suite

Studio

26.67

511314

6818

One B/Room

33.33

639142

18261

Two B/Room

40.00

766970

51131

Entire Cost

100.00

1917426

A

The three patient degrees are represented by those with no medical demands, medium medical demands and high medical demands. These three degrees consume supportive services otherwise and therefore should be charged harmonizing to their use of these services as opposed to suite size. Supportive services represent the highest costs in Westmount. The excel sheets below indicate the allotment in per centum of the three supportive costs viz. nursing supervisors, nursing attenders and dietitians.

Nursing Supervisors

Patient Care

Res. No.

Hrs/Res/Wk

Hrs/T.Res/Wk

Hrs/T.Res/Yr

( % )

No Medical Needs

55

0.25

13.75

660

6.51

Medium Medical Needs

65

1.5

97.5

4680

46.15

High Medical Needs

40

2.5

100

4800

47.34

Entire

A

A

211.25

10140

100.00

Nursing Attendants

Patient Care

Res. No.

Hrs/Res/Wk

Hrs/T.Res/Wk

Hrs/T.Res/Yr

( % )

No Medical Needs

55

1.3

71.5

3432

15.66

Medium Medical Needs

65

3

195

9360

42.72

High Medical Needs

40

4.75

190

9120

41.62

Entire

A

A

456.5

21912

100.00

Dieticians

Patient Care

Res. No.

Hrs/Res/Wk

Hrs/T.Res/Wk

Hrs/T.Res/Yr

( % )

No Medical Needs

55

0.1

5.5

264

8.15

Medium Medical Needs

65

0.4

26

1248

38.52

High Medical Needs

40

0.9

36

1728

53.33

Entire

A

A

67.5

3240

100.00

The above excel sheets illustrate the per centum portion of the nursing supervisors, nursing attenders and dietitian ‘s costs between the patient categories of no medical demands, medium medical demands and high medical demands. This will be used in allocating supportive services costs among the three groups ; No medical demands, medium medical demands and high medical demands. A sum-up of this allotment is shown in the excel sheet below. Note that this information has been derived from the tabular arraies above and this tabular array forms the sum-up.

Cost Share in Percentage ( % ) per Year

A

No Medical Needs

Medium Medical Needs

High Medical Needs

Nurse supervisors

6.51

46.15

47.34

Nurse Attendants

15.66

42.72

41.62

Nurse Dieticians

8.15

38.52

53.33

The cost associated with supportive costs in the twelvemonth 2005 is $ 548,573. To apportion this between the nurse supervisors, attenders and dietitians, the ratio of their costs per annum should foremost be determined utilizing informations from the current rewards payment information and their working hours. This is illustrated in the excel sheet below.

A

No.

Hrs per Wk

T.Hrs per Wk

Cost per Hr ( $ )

Wks in Yr

Annual cost ( $ )

( % ) Ann.Cost

Nurse supervisors

5

47

235

18.5

48

208680

38.70

Nurse Attendants

10

50

500

11

48

264000

48.95

Nurse Dieticians

2

37.5

75

18.5

48

66600

12.35

Entire

A

134.5

810

A

A

539280

100.00

The per centum one-year cost for each of the nurse class from this tabular array can so be used to allocate the supportive cost of $ 548,573. This is illustrated in the sheet below.

Entire cost of Supportive Services

Supervisors

Attendants

Dieticians

100 %

38.70

48.95

12.35

548573

212276

268549

67748

This cost figures for each section organize the footing through which the tabular array for cost portion in per centum is applied to acquire the exact cost portion for the three categories of occupants for the twelvemonth 2005. The tabular array below illustrates the exact costs where each is the per centum portion multiplied by the costs incurred for each nurse class as shown in the above tabular array.

A

No. Master of educations

Medium Master of educations

High Master of educations

Entire Cost ( $ ) /Yr

Nurse supervisors

13817

97974

100486

212276

Nurse Attendants

42062

114714

111773

268549

Nurse Dieticians

5520

26096

36132

67748

Entire Cost ( $ ) /Yr

61399

238783

248391

548573

Therefore, from this analysis, it can be said that persons necessitating no medicine take up $ 61,399 of the supportive costs, those necessitating average medicine consume $ 238,783 while those necessitating high medicine consume $ 248,391 per twelvemonth. This attack takes into consideration both the three degrees of patient attention that basically affect the supportive costs entirely and the three suite options that affect all other costs including overhead costs. A more luxuriant costing attack would hold considered resident Numberss in allocating costs such as those of nutrient service and wash while utilizing the three suit option for diversion, installation and housework and the three degrees of patients for supportive costs.

The new cost per patient under each of the options

The new cost under this option will be based on the degree of medicine required and the suit that a resident occupies. This will ensue in a combination of costs for the different patients shacking in different suits. The Sheet below shows the cost allotment of the supportive costs per occupant per twelvemonth for the three medical categories.

A

Entire Cost ( $ ) /Yr

Residents

Cost Amount ( $ ) /Yr/Resident

No. Master of educations

61399

55

1116

Medium Master of educations

238783

65

3674

High Master of educations

248391

40

6210

Entire Cost ( $ ) /Yr

548573

160

11000

The undermentioned sheet indicates the cost allotment of all other costs based on the suit size, per suit per twelvemonth.

Suites

Percentage ( % )

Cost Amount ( $ ) /Yr

Cost Amount ( $ ) /Yr/Suite

Studio

26.67

511314

6818

One B/Room

33.33

639142

18261

Two B/Room

40.00

766970

51131

Entire Cost

100.00

1917426

A

The combination of this two bing attacks will give the cost required of every occupant per twelvemonth depending on what suite they reside in and the degree of medicine required for each occupant. The entire cost options are therefore nine as shown in the excel sheet below.

A

Other abode costs

Supportive costs

Entire cost per client

Studio No. Master of educations

6818

1116

7934

Studio Medium Meds

6818

3674

10491

Studio High Meds

6818

6210

13027

One B/Room No. Master of educations

18261

1116

19378

One B/Room Medium Meds

18261

3674

21935

One B/Room High Meds

18261

6210

24471

Two B/Room No. Master of educations

51131

1116

52248

Two B/Room Medium Meds

51131

3674

54805

Two B/Room High Meds

51131

6210

57341

This information can be summarized in matrix signifier as shown below. All the figures shown are in dollars. They have been computed per suit and non per persons populating in each suit. In sleeping room suites with more than one occupant, a premium can be added on the monetary values below to provide for the excess costs.

A

No Medicine

Medium Medication

High Medicine

Studio

7934

10491

13027

One B/Room

19378

21935

24471

Two B/Room

52248

54805

57341

Utility of this new information to Roswell

This information is really utile to Roswell as he will now be in a place to easy get at a base cost through which he will be able to objectively monetary value the suites. Roswell merely needs to set the above information if costs change and to see the expected rising prices in the approaching twelvemonth. Roswell will besides be able to distinguish Westmount ‘s merchandises therefore increasing the abode ‘s fight.

Monetary values that Roswell should urge

Roswell has indicated that he requires a 15 % border over the cost to cover for replacing of assets and growing every bit good as the stockholders involvements. To accomplish this, Roswell will merely necessitate to add a premium of 15 % on the above cost matrix for the assorted clients. This is illustrated in the excel sheet below:

A

Entire cost per client

15 % Margin

Cost Plus 15 % Margin

Studio No. Master of educations

7934

1190

9124

Studio Medium Meds

10491

1574

12065

Studio High Meds

13027

1954

14981

One B/Room No. Master of educations

19378

2907

22284

One B/Room Medium Meds

21935

3290

25225

One B/Room High Meds

24471

3671

28142

Two B/Room No. Master of educations

52248

7837

60085

Two B/Room Medium Meds

54805

8221

63026

Two B/Room High Meds

57341

8601

65942

The column cost plus 15 % border represents the new monetary values. This can be represented in a condensed pricing matrix as shown below.

A

No Medicine

Medium Medication

High Medicine

Studio

9124

12065

14981

One B/Room

22284

25225

28142

Two B/Room

60085

63026

65942

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