MANAC-II Assignment

Westmount Retirement Residence

Costing System and Analysis

By
Abhinav Prusty – B19001
Hari Sankar S – B19018
Soham Ghosh – B19052
Executive Summary:
Helen Roswell, was the administrator of Westmount Retirement Residence . This residence was mainly
involved in providing assistance in the form of assisted living and supportive living options to seniors
over the age of 75 in the society. Room options included studio, one bedroom and two-bedroom
suites.The industry of retirement homes was seeing huge demand and there were a good number of
Canadians as potential customers. There was a lot of competition in the London market , and consumers
were also using price as the metric for choosing the homes.
Ideally, 21% of a retiree’s income was allocated for the cost of residency , but Westmount’s expensive
facilities and amenities ensure that close to 85% of retiree’s income is spent on their homes. The major
competitors were: Chelsea Park Retirement Community, Central Park Lodge and Longworth
Retirement Village
The major costs were allocated to food service, support services, laundry, recreation, facility and
housekeeping, with each department managing their own expenses. Currently, the costing system is
such that cost per resident is calculated by dividing the total costs by number of residents. This value is
then multiplied by projected inflation rate of 5-8% to get the value for next year. This is the base cost
for studio apartments, and the cost of one bedroom and two bedrooms are calculated by adding 25%
and 50% on the base cost. The problem was in allocating costs of nurses. Hence, the drawback here is
that the varying service need of residents cannot be calculated, as some couples shared one-bedroom
spouses with their husbands, while some stayed alone.
Problem Statement:
Currently, the costing system being employed does not capture the varying service required for different
residents. The main objective is to improve Westmount’s net profit, and come up with a new costing
system and precise pricing model which can determine costs of each department. This model will reflect
the service and medical care required for each resident and also the size of room that they occupy.
Alternatives:
Currently, all costs are taken as fixed costs. As an alternative, cost for support services can be allocated
using Activity Based Costing (ABC). Cost for food and laundry service can be allocated using direct
costing, based on the consumption of each service by residents. Thus, based on the square foot area,
cost of supplies and others will be allocated to each department , and based on number of employees ,
the cost of wages will be allocated.

Taking data from Exhibit 4, we get :

Total no. of employees = 29
Allocating wages from General and administrative expenses based on number of employees , Overhead
costs = $149,293 + $217,804 = $367,097

Cost before Ratio of employees Allocation from Cost after

Allocation in each department Overhead Allocation
Food Services $257,671 3/29 $37,975 $295,646
Supporting 538,392 17/29 215,189
Services 753,581
Laundry 77,972 2/29 25,316 103,288
 Recreation 32,303 2/29 25,316 57,619
Facility 37,872 2/29 25,316 63,188
Housekeeping 107,053 3/29 37,975 145,028
Total $1,051,263 $367,087 $1,418,350

Supplies Overhead Costs are allocated to Direct costs based on the square feet area used by each
department ($61,921):
Total area = 115900 sq.ft

Allocation from Cost after

Overhead Allocation
Food Services $3,259 $255,756
Supporting
Services 5,449 15,630
Laundry 2,404 8,513
Recreation 18,913 29,094
Facility 30,186 38,381
Housekeeping 1,710 9,855
Total $61,921 $357,229

Other Overhead Costs:

Allocation from Cost after
Overhead Allocation
Food Services $27,482 $27,482
Supporting
Services 45,954 45,954
Laundry 20,274 28,419
Recreation 159,486 159,486
Facility 254,547 414,663
Housekeeping 14,417 14,417
Total $522,159 $690,420

Thus, the cost allocated to each department is :

Wages and Supplies Others Total
Benefits
Food Services $295,646 $255,756 $27,482 $578,884
Supporting
Services 753,581 15,630 45,954 815,165
Laundry 103,288 8,513 28,419 140,220
Recreation 57,619 29,094 159,486 246,199
Facility 63,188 38,381 414,663 516,232
Housekeeping 145,028 9,855 14,417 169,299
Total $1,418,350 $357,229 $690,420 $2,465,999
Allocation of Cost to Residents and Suites

Number of residents in 2005 = 160

From the above table, we can charge food services , laundry and recreation to the residents . Hence the
value per resident can be calculated as follows:

Total
Food Services $ 5,78,884.00
Laundry $ 1,40,220.00
Recreation $ 2,46,199.00
Total $ 9,65,303.00
No. of residents 160
Cost/resident $ 6,033.14

Facility Cost:

Further allocating the cost of Facility to residents based on the preference described by Roswell:
Total Cost of Facility = $516,232
Allocating half to all 160 Residents= (516,232/2) = $ 258116
Cost per resident = $ 258116/160 = $1,613.23 per resident
So, cost per square feet = $ 258116 / ( 400*75 + 500*35 + 600*15) = 4.57
The remainder is allocated based on square feet , irrespective of number of residents
Total Cost per suite
Studio (400 Sq. ft.) 4.57*400 = $1828
One-bedroom (500 Sq. ft.) 4.57*500 =$2285
Two-bedroom (600 Sq. ft.) 4.57*600 =$2742

Medical care cost

Cost split will depend on two major factors: number of hours spent by nurses and number of hours spent
by dieticians. The 3 sub-categories are : medical needs, medium medical needs and high medical needs

Total hours of nurses per Total hours of

No. of patients week Dieticians per week
No medical 55 13.75 5.5
Medium medical 65 97.5 26
High medical 40 100 36
160 211.25 67.5
The total expenses is then in the ratio as per the previous table for patients with different level of medical
needs
Nursing Dietician Total cost
expense expense Total Expense /Patient
No medical $ 31,347.94 $ 5,455.56 $ 36,803.50 $ 669.15
Medium medical $ 2,22,285.41 $ 25,789.93 $ 2,48,075.33 $ 3,816.54
High medical $ 2,27,985.03 $ 35,709.13 $ 2,63,694.16 $ 6,592.35
Total $ 4,81,618 $ 66,955 $ 5,48,573.00 $ 11078.04

Cost based on Room Size :

Cost split based on Proportion

Room size # of rooms Proportion of area of area Cost / room
Studio 75 53% $ 1,70,644.78 $2,275.26
1 Bedroom 35 31% $ 99,542.79 $2,844.08
2 Bedroom 15 16% $ 51,193.43 $3,412.90
Total 125 100% $ 3,21,381.00 $ 8532.24

Final Costing based on medical needs and type of room

The values are obtained by adding the values of above two tables , and including the target profit margin
of 15%.
No medical Medium medical High medical
Studio $14,857.65 $ 18,477.15 $ 21,669.33
1 bedroom $15,511.79 $ 19,131.29 $ 22,323.47
2 bedroom $16,165.93 $ 19,785.43 $ 22,977.61

Conclusion:

Housekeeping cost and facility cost are allocated as per square feet area of room. The costs of food
Services, laundry and recreation are allocated to each resident, which do not depend on room size. This
keeps Westmount’s prices at a competitive price with respect to other players in the market, and in line
to achieve higher revenues