County Services – Case Study
You are hired as a Management Consultant from McKinsey with some recognition among prestigious accounting and costing circles. Here is the run down of the case…..
Union County serves a populace of around 40,000 citizens, and carries out certain welfare services for its citizens such as a recreation facility complete with gymnasium, a library, children’s park, fire service, ambulance service etc. While a few selected services are provided free, most services are charged for at subsidized rates. You are asked to provide well informed answers to three questions pertaining to the County/Municipality’s Ambulance Service.
The three questions are:
(i) What is the total cost of providing the ambulance service in Union county?
(ii) To what extent are the current service costs covered by fees charged?
(iii) An outside ambulance service provider has offered to run this service for the Municipality for an Annual fee of $ 180,000, beginning from Year-05. Does it stand to gain by accepting this offer?
The framework to attack this case: Probe for more info/clarify given data, structure the framework, analyze and conclude. Assume reasonably. Don’t forget contra-accounts such as depreciation.
Gathering Information:
1.1 Let’s set about this process of gathering information in a logical step by step basis. While the 3 questions above comprise the area of study, which comprises Step 1, Step 2 comprises of getting things organized.
1.2 The Board of Councilors has already got a comprehensive case study underway by a specially selected panel from the Union Municipality comprising its Deputy Commissioner, Accountant, Treasurer and Fire Station Chief among a few others.
1.3 Preliminary data collected by the panel indicate that the Ambulance Service which is a part of the fire department provides a 24/7 emergency service with “X” runs done in base year Y-01. The ambulance service unit is manned by 9 trained Emergency Medical Technicians (EMT)s. This Service is primarily for meeting the day-to-day needs of the local hospital for ambulance services, while responding whenever possible to emergency calls for assistance from other state/private institutions too within the Union County Area.
1.4 The fee levied per run is $140 in keeping with rates charged by two other well known similar non-profit making organizations elsewhere. It is the Municipality’s policy to limit fees charged to 27.5% of the total cost of providing the service. It was also revealed that on average, 75% of the fees invoiced (by the Treasurer) were duly collected.
INITIAL DATA COLLECTED RELEVANT TO THE PROJECT
DATA/INFORMATION SHEET I – HUMAN RESOURCE RELATED COSTS
| Type of Cost | Direct Costs | Indirect Costs |
(Base Year) – Y-01 Costs |
||
|
Item No. |
Direct Costs ($) |
Indirect Costs ($) |
|||
| (a) Basic Salary / Wages(b)Overtime(c) Other Benefits (Fringe Benefits)(d)Training & Education(e)Administration
(f) Pensions
|
Total Salaries $189,627.Total Overtime $ 5,060. Leave pay, Social / Welfare Allowances, Medical etc.$ 33,505 Annual Fee of Trainer$ 1,250Supervision costs of ambulance personnel is estimated @ 20% of Fire Chief’s Annual Total Salary, allowances and fringe benefits.$ 44,600 @ 20% = $8,290.This is taken as an Indirect Cost, and apportioned as per details in next column.
(The pension appropriation on ambulance personnel has been pre-calculated as $ 720,000.)
|
Apportioned as a percentage of the total ambulance personnel salaries (Item (a) $ 189,627 to the total salaries of all Municipality employees contributing to the pension scheme (S 4,760,075) = 3.99%. 3.99% of Y-01 pension appropriation of $ 720,000. 3.99% of $ 720,000 = $ 26,728.
|
(a)(b)(c)(d)
(e)
(f)
|
189,627 5,060 33,505 1,250 8,920 0 |
0 0 0 0 0 26,728
|
| D/I SHEET I – Total Human Resource Costs (D/C + I/C)$ 265,090 |
238,352 |
26,728 |
DATA/INFORMATION SHEET II – FIXED ASSETS – (Capital, Maintenance and Operating Costs)
| Type of Cost | Direct Costs | Indirect Costs |
(Base Year) – Y-01 Costs |
||
|
Item No. |
Direct Costs ($) |
Indirect Costs ($) |
|||
| (a) Ambulance (Capital Cost) (b) Repairs & Maintenance
(c) Operating Costs
(d) Other Consumables
(e) Other related Equipment Supplies & Maintenance Costs
(f) Insurance on Ambulance |
Purchased 3 years back (with an effective working lifespan of 6 years) at a cost of$ 54,000.$ 54,000 / 6 = $ 9,000.Total Cost of Repairs and Maintenance Charges including Periodical Servicing Costs actually incurred during Y-01= $ 1,785.2372 gallons Gasoline @ an average price of $ 3.55 per gallon = $ 8,420.60. Add Cost of Oil used $ 40. Total = $ 8,460.60
Medical Supplies, oxygen, blankets etc. Total actually incurred for Y-01 = $ 1,330
Annual Guaranteed Contractual Payment for Maintenance of Communication Equipment = $ 580
Annual Premium $ 1,160 |
(a)
(b)
(c)
(d)
(e)
(f) |
9,000 1,785 8,461 1,330 580 1,160 |
0 0 0 0 0 0 |
|
| D/I SHEET II – Total Fixed Assets Capital Costs & Maintenance & Operating Costs = (D/C + I/C) = $ 22,316. |
22,316 |
0 |
|||
DATA/INFORMATION SHEET III – FACILITATING COSTS (INDIRECT COSTS)
| Type of Cost |
Direct Costs |
Indirect Costs |
(Base Year) – Y-01 Costs |
||
|
Item No. |
Direct Costs ($) |
Indirect Costs ($) |
|||
| (a) Leasing Charges on Land & Buildings (b) Utility Charges
(c) Insurance on Buildings
(d) Maintenance of Buildings
|
Y-01 Total Cost of $ 175,000 for Union Municipality is apportioned on the basis of ratio of land area occupied by Fire Dept. (under which the ambulance operates) to the entire land area = 22%.22% of $ 175,000 = $ 38,500Y-01 Total Cost of $ 2,112 made up of Electricity, Heat & Telephone is apportioned to the Ambulance Service @ 22%. (Note: Cost of water is fully borne by the Fire Engine).22% of $ 2,112 = $ 464.64Total Cost for Fire Station determined on an hourly rate = $ 5,920.22% of $ 5,920 = $ 1,302.40Total Cost for Fire Station determined on an hourly rate = $ 2,030.
22% of $ 2,030 = $ 446.60 |
(a)
(b)
(c)
(d)
|
0 0 0 0 |
38,500 465 1,303 447 |
|
| D/I SHEET III – Total Facilitating Costs = (D/C + I/C) = $ 40,715. |
0 |
40,715
|
|||
DATA/INFORMATION SHEET IV – MISCELLANEOUS COSTS
| Type of Cost |
Direct Costs |
Indirect Costs |
(Base Year) – Y-01 Costs |
||
|
Item No. |
Direct Costs ($) |
Indirect Costs ($) |
|||
| (e) Indirect Operating Costs
Note: There are no other pooled expenses to apportion, applicable to the Ambulance Service.
|
Indirect Operating Costs of Treasurer’s & City Accountant’s Departments are pooled. This total cost is then apportioned to various services of the Municipality on the ratio of Direct HR Costs of each service, to Total Direct HR Costs of Union Municipality. Total HR Cost of Ambulance Service = $ 237,112 (as per Data/Information Sheet I). This works out to 2.7% of the corresponding Grand Total for entire Union Municipality. This ratio of 2.7% is then applied on Total Direct HR Cost of Ambulance Service of $ 237,112.2.7% of $ 237,112 = $ 6,402.02 |
(a)
|
0 |
6,402 |
|
| D/I SHEET IV – Total Miscellaneous Costs = (D/C + I/C) = $ 6,402. |
0 |
6,402
|
|||
TOTAL COSTS: Direct + Indirect
| Type of Cost |
Direct Costs ($) |
Indirect Costs ($) |
Total – Direct and Indirect Costs ($) |
||
| D/I SHEET I – Total Human Resource CostsD/I SHEET II – Total Fixed Assets Capital Costs plus Maintenance & Operating CostsD/I SHEET III – Total Facilitating CostsD/I SHEET IV – Total Miscellaneous Costs
|
238,362 22,316 0 0 |
26,728 0 40,715 6,402 |
265,090 22,316 40,715 6,402 |
||
|
260,678 |
73,845 |
334,523 |
||
(as per 1.3 and 1.4) = $ 107,380 75% (being the average collection rate for the Municipality for the year) of total fees receivable of $ 107,380 = $ 80,535
|
80,535
|
||||
|
253,988 |
||||
Conclusion:
From the information above, we can now proceed to provide the answers to the 3 question posed at the beginning.
(i) The total Cost to the Union Municipality of providing the Ambulance Service (as per A above) is $ 334,523, and the net cost after fees collected (as per C above) is $ 253,988.
(ii) The extent of the service covered by fees collected is = 80,535 / 334,523 (as per A & B above) = 24.07%. However, since the Municipality Policy allows for the service to be covered up to 27.5% with fees (as per 1.4), there is provision to increase the fees up to $ 159 per run. Whether the Municipality should go all the way and increase the fees up to $ 159 per run or even by a single additional dollar per run, or change the Municipality policy so as to go beyond 27.5% and fix it at a still higher percentage so as to be able to increase the fees per run to a still higher level to increase its economic gains as against adhering to a principle of providing this service more as a socio-welfare measure is a decision that has to be taken collectively by the Municipality’s Councilors based on the information gained from this analysis.
(iii) The third question is whether the Union Municipality would profit by accepting the offer of the private contractor to run the service for the Municipality at a fee of $ 180,000 per year starting from Year-05.
1.1 In order to answer this question, we need to recalculate the projected costs for Y-05 based on further information provided by the Municipality. If it is decided to contract out the service from Y-05, it would become necessary to ascertain the Avoidable Costs (i.e., cost savings – especially personnel related and ambulance running and maintenance related costs) that decrease consequent to a discontinuance of the service by Municipality employees using Municipality resources.
1.2 If it is decided to accept the contractor’s offer, it is stipulated that the contractor should continue to provide the service at the present level of $ 140 per run, and be solely responsible for billing and collection, since the fees collected will now be their property.
1.3 Proceeding step by step, Step 1 would constitute Estimation of the projected costs for Y-05 assuming that the Municipality continues to run the service subject to new information provided below:-
(a) HR related costs are estimated to increase at 6% per year over Y-02 to Y-05.
(b) No. of ambulance runs are expected to increase by 40 runs each year so that the projected no. of runs for Y-05 would be (767 + 40 + 40) = 847 runs which represents an overall increase of 10.4% over the base year Y-01 (80/767*100). This increase will affect all related supplies and maintenance costs too by the same percentage.
(c) Costs not expected to change are building debt comprising capital repayments and lease finance charges, guaranteed service maintenance contract on ambulance communication equipment.
(d) The contractual payment for personnel training is also expected to rise by 6% annually.
(e) All other charges are estimated to rise by 4.5% annually over Y-02 to Y-05 including the Annual Insurance Premium on the Ambulance.
The numbers above are not that important; its the approach towards solution that counts in the interviews. When you are looking at costs, remember to substantiate you answers about indirect allocations.