The ABCs of Costing

Long looked upon as a cost center — from an accounting point of view — biomedical departments, in some instances, are being re-evaluated as a service center. With that new designation, however, comes new accounting and budgeting responsibilities.

Ideally, these new service-defined departments would have budgets, autonomy and control that would allow them to identify, enumerate and track internal costs plus the costs of servicing other departments, such as perioperative services (the OR), intensive care units, laboratories and all the rest. But while waiting for the ideal to materialize, there are several strategies, some more structured than others, to help biomeds determine service costs.

Activity-Based Costing (ABC) is an accounting method that allows an organization to determine the cost associated with each product and service produced by the organization without regard to the organization’s structure. It allows managers to see which products or services are profitable — and which are not. Basic steps for implementing ABC involve analyzing activities, gathering costs, tracing costs to activities, establishing output measures and analyzing costs processes.

An example of how ABC could work in biomed comes from David Braeutigam, supervisor of biomedical engineering at Baylor University Medical Center (Dallas, Texas):
Your car’s brakes need work. You make an appointment at Shop A, a business that advertises all automotive repairs, from the simple to the complex. A lower-paid, entry-level mechanic handles brake work; he is paid $15 an hour. Auto technicians with 15-20 years of experience who command a higher hourly rate handle the more difficult repairs — not unlike the biomed environment, Braeutigam points out. Shop A follows traditional accounting methods which consider all overhead and come up with a set service rate — $45 an hour, for example — no matter what comes in the door.

Meanwhile, a new auto service center opens across town. Shop B specializes in brake work and employs entry-level mechanics. The shop’s set service rate: $35 an hour.

If Shop A were to use ABC accounting, it could break out its costs. Instead of charging $45 an hour across the board, labor costs could be $30 an hour, for example, for simple activities, such as brake shoes and oil changes. More technical repairs would demand a higher rate, say $55 an hour.

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