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Faster, easier cost accounting by personal computer.

It was two years ago, but I still remember that hurried phone call from the laboratory administrator. "We're going to revise the fee schedule," he said. "The executive board wants to know exactly where the money goes, and we need an account of your procedural costs by next month."

Next month? An in-depth cost accounting could take six months or more. In the following weeks, I spent long evenings poring over invoices and punching the calculator to estimate the costs per test for oru small, independent renal dialysis lab. Like most supervisors, I was promoted from the technical ranks with no previous business training. I relied on the usual guidelines for my first fee schedule evaluation: third-party reimbursement schedules, competitors' fees, notes from the technical staff, and a lot of intuition. The longer I used them, the less certain I was that the lab's fees accurately reflected true costs.

A personal computer seemed an ideal tool for a faster, more accurate reckoning. The lab already used a microcomputer for functions like quality control and procedure manual revisions; unfortunately, it wasn't programmed to help with this problem. After painstakingly finishing my report by hand, I resolved to write a computer program that would make the job easier next time around.

I wanted a program flexible enough to calculate costs for every test on the menu, and versatile enough to adjust for changes in fees, salaries, and other factors. First, some research was in order. The local library, I found, had a shell full of books on cost accounting, and I brought a stack of them home.

After much reading and reflection, I began to design my program by establishing some guidelines common to all the lab's procedures. To define the cost areas under study, I mapped out four distinct categories: overhead, reagents and associated supplies, expendables, and labor.

Next, I created a data collection worksheet on the computer (Figure I). The four members of our technical staff were assigned to record reagent and expendable usage for all procedures. I tracked the costs of each item--no easy task, especially when it involved hunting down prices of months-old inventory.

Finally, I felt confident that all significant cost data were gathered. Armed with intermediate-level computer skills, I started to write an accounting program for our Apple II computer, building in formulas to calculate each cost component. The project was more complicated than I'd anticipated, but eventually I developed the kind of system I wanted.

Of course, you don't have to use a computer to follow this basic cost-accounting blueprint. However, the initial investment of time and effort in program design has rewarded us amply. Now we can produce a clear, comprehensive picture of our costs for each procedure--an increasingly valuable asset under Diagnosis Related Groups. Just as important, we can easily consult or update the information in minutes instead of hours.

Let's examine the accounting process for one test--glucose--on a batch and single-test basis. Using a few basic formulas, most of which are shown in Figure II, we'll follow the data from the worksheet to the final reports in Figures III and IV for a concise comparison of relative costs and potential savings.

* Overhead. This category covers all fixed costs, beginning with the building, its maintenance, and utilities. In projecting maintenance costs and utility rate increases, historical data are usually a reliable guide. Repair costs are harder to predict, but must be included. We estimated our annual repair bills at 10 percent of the instrument's purchase price, a figure generally agreed on by repair experts.

Administration and supervision costs consist mainly of salaries, a fairly simple component to identify. Take extra care in assessing these costs for supervisory personnel who also work at the bench. I asked laboratory administration to formally determine an appropriate time division between bench work and management for our technical supervisors. I also separated test-specific supervision costs from generalized ones, placing consultation and retainer fees in the latter group.

General operating expenses is a catch-all category of office and computer supplies and equipment, safety equipment, glassware, and other nonspecific items. Included here are accounting and housekeeping department costs for the parent company of our two reference facilities. We had to guesstimate the proportion of time devoted exclusively to our lab by each company department.

Instrumentation is the next major fixed cost. Don't forget to account for the many minor expenses in this area. We kept track of pipettes, diluters, and related items on the worksheets, making sure to distinguish between general operating costs and procedure-specific ones.

Use caution when estimating an instrument's life span, because technological developments can hasten obsolescence. I relied on technological forecasts, administrative decisions, and information supplied by manufacturers' representatives. In the past, we had neglected to account for the cost of instrument updates and retrofits. Now our laboratory assigns an updating cost factor, usually 7 to 10 per cent of the instrument's purchase price, rather than carve these costs from the profit margin.

Inventory is the last major operating cost. Our old accounting system overlooked a sizable amount of tied-up capital in this area, so we integrated a percentage into th ecost of each procedure. Further analysis showed that we could cut yearly inventory costs by several thousand dollars through more prudent and timely purchasing. The purchasing improvements required better record keeping and some in-service education on effective inventory control.

Now let's follow the formulas in Figure II. To tally total fixed costs, calculate the annual base cost for each component, based on useful life and yearly maintenance. For our purposes, ongoing expenses like rent and inventory have a "useful life" of one year. Next, divide this annual base by the yearly test volume to obtain the overhead cost per test.

Divide general costs, like administrative expenses, by the total test volume, and specific costs only by the number of tests involved. As Figure I shows, the lab performed a total of 50,000 procedures last year. Only 35,000 of them involved the chemistry analyzer, however, and a subset of 1,200 utilized the glucose testing inventory.

* Reagents and supplies. In this step, the technical staff must carefully note what each procedure consumes. Accurate workload recording is vital to determine the amount of reagent used in primary and backup procedures for each patient run or chargeable test. We count as wasted tests all internal repeat runs; outdated reagents for tests, standards, and controls; parallel runs for new reagents and lot numbers; and sera and reagents for standards and quality control. This reagent waste factor is always surprisingly high in our laboratory, despite vigorous conservation efforts.

To determine reagent expenses, we adjust for waste on each procedure (adding to its cost), and then calculate patient tests, standards, and controls based on the number of procedures and chargeable tests in each batch.

* Expendables. By this phase in my program, I was developing a knack for finding hidden costs. Four guidelines proved helpful in the expendables category. First, list on the worksheet any expendables not included with test kits. Then scan procedure manuals for items overlooked at any stage of testing, from patient preparation and specimen collection through test performance.

Thrid, calculate costs using either the manufacturer's list price or an average of several vendors' list prices. Finally, assign an extra charge to specimens requiring special handling, instead of spreading the cost among all specimens in a batch.

My relationship with laboratory suppliers, by the way, has improved along with my cost accounting expertise, and I negotiate more confidently. I'm no longer looking for the lowest one-time bid, but for the vendor who offers the best price over a given time period, with the service to back it up.

There are many ways to calculate the cost of expendables. By trial and error, I developed six different formulas, depending on type of usage--per batch, for example, and for patient tests, standards, and controls, separately or in combination. Each item is coded accordingly, and the computer performs the math.

* Labor. This is the costliest part of a test in most laboratories, and ours is no exception. PErsonnel costs, I found, are among the hardest to assess.

I wanted to identify these costs by position rather than individual to protect employee privacy. I also wanted the ability to show cost fluctuations for test performance at different staff levels.

For a full picture of our labor costs, I compiled not only salary expenses related to testing, but also the cost of benefits and non-testing time (Figure V). The employee handbook and conptroller's office provided most needed information, and administration approved the final list. Some items, like in-services, aren't usually listed among standard benefits, but they do add to labor costs. Others, like professional meetings, are averaged as an overall benefit although only a few employees attend.

I derived a benefits factor from the list and applied it to staff salaries. In our glucose testing example, this multiplier is 1.44. Using the adjusted salary figure, I obtained processing and performing costs for technical and nontechnical staff, and for batch versus single runs.

The final reports show the minimum, maximum, and average cost for performing a blood glucose on the ABA-200 in our lab. It's easy to see the economies of volume testing. A single test costs an average of $9.87, while one in a 10-test batch costs $6.27. For a batch of 24, the cost per test would drop still lower, to $3.22.

Thanks to the microcomputer, we can call up and print out data like these with little time or trouble. We can make revisions throughout the program as needed, identify overpriced or undepriced tests, or learn how small a batch we can run while remaining cost-effective. We also have the luxury of storing information on a floppy disk instead of in bulging file folders.

As we refine the program, we discover new uses for it. Last year, for instance, the laboratory agreed to assist in a research project. The researcher wished to pay only for tests performed and not for administrative costs. A reasonable request, but how many labs--especially small ones--could produce a prompt, detailed cost breakdown? We could.

Now that prospective payment is accentuating the competition among independent laboratories and hospitals, the computer is also a valuable marketing tool. We can bid more intelligently, justify fees, and plan workload for optimum efficiency. Best of all, the speed and ease of programmed accounting make the task almost painless.
COPYRIGHT 1984 Nelson Publishing
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Copyright 1984 Gale, Cengage Learning. All rights reserved.

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Author:Nielsen, Marc P.
Publication:Medical Laboratory Observer
Date:Jul 1, 1984
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