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Using ABC to show cost savings

June 2001
Anne Paxton

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A year ago, Ernest J. Binder, MT(ASCP), had never heard of activity-based costing. As chief operations manager of Central Plains Laboratories, a reference clinical and anatomic pathology laboratory in Hays, Kan., Binder was invited by Park City Solutions, Laboratory Services Group (formerly Chi Laboratory Systems) to try out cost accounting software called CostCrusher LabAudit Software. The program is made by the Swiss firm TISMO, an abbreviation for "time is money." Now that he has tried CostCrusher, Binder is sold on the benefits of ABC.

"TISMO has most of the tools already built into the system," he says. "You create your worksheets with the activities you perform. The program asks you to estimate disposables, the amount of wastage, the number of repeats, the number of controls run per day, other steps or activities involved with the procedure, and so on. Once you’ve built an activity base, you print off the worksheet, give it to people, and they do time studies as they walk through the program."

Central Plains Laboratories has about 60 clinical staff who handle 1,200 to 1,300 requisitions a day, 80 percent of them reference work from a seven-state area. "We walk around with stopwatches," Binder explains. "People write down that it takes them x number of minutes to do each activity—aliquots, controls, adding reagents, starting the instrument, or whatever activity is involved. Every step is recorded and entered into the computer system. Then the computer system crunches all the data and comes out with a standard or average time for each activity, then assigns the individual test costs, factoring in the reagents, equipment, salaries, etc., costs that have been previously entered. It lets you know from the front end to the back end how much each step costs."

The most difficult part is identifying all the steps involved in creating the worksheet, Binder says. But the effort has paid off, because CostCrusher was able to show that the laboratory’s recent changeover to new equipment has indeed allowed it to save money. "It gives you cost savings you can show on a report to your owners," he says.

"My goal is to determine how much it’s costing me to do business on a client-by-client basis. If I have clients with poor penmanship, or who don’t include ICD-9s, and I have to continually call for additional information to complete the order, then I will have hard figures to indicate the cost of doing business with that client. On the other hand, if I have clients who continually do everything right the first time, the cost of doing business with them is less, which in turn could allow us to give them additional client benefits." He would also like to use ABC to track individual performance across the entire laboratory, to determine how efficient people are in processing and testing specimens.

In the future, Binder hopes to employ CostCrusher to track vendors’ promises about their equipment. Once the vendor has identified all the controls, reagents, setup time, and so on, and they have been entered into CostCrusher, "I would make sure the vendor agreed to all the times they had given me, then hold them to their contracts. This is what you said, this is what I counted on, now why isn’t it happening? It’s a better way of holding the vendor accountable for what was said at the time of sale. Otherwise you’re at their mercy."

If there is a drawback to ABC, he says, it is that the process does take time, and it does take commitment from the entire staff. "You can’t just put it in a bottle, pour it out, and make it work." But the bottom line, Binder maintains, is that ABC accounting tells laboratory managers the true cost of doing business. "It doesn’t give you a ‘guesstimate.’ It gives a very close accounting of every step along the way."