The Flexible Budget Process—, Tool for Cost Containment
J. RICHARD PEARSON, P H D . , PEGGY C. ROMFH, M.S., JEANNE M. HABIB, B.S.,
AND MORRIS J. FRIELING, M.S.H.A.
This past year the authors have been using a new tool to
examine and monitor their laboratory's expenditures. Called
"flexible budgeting," this process has been used to analyze the
cost behavior of all operating expenses, establish budget levels
for different levels of activity, and monitor activity based on
relative cost rather than simply the number of tests performed.
The authors' experience has shown that this tool provides
much more information than previous procedures. However,
better methods need to be developed for monitoring expenditures
so that this information can be used effectively. (Key words:
Cost containment; Flexible budgeting; Laboratory management)
Am J Clin Pathol 1985; 84: 202-208
LIKE ANY OTHER type of budget, the objectives of
the flexible budget process are control and planning. A
flexible budget identifies costs that are controllable.
Thus, the laboratory manager has the information needed
to modify expenditure projections when levels of activity
increase or decrease. In addition, because increased
information is available in a flexible budget, the laboratory manager can more readily provide input relevant
to the changing charge and cost-reimbursement mechanisms.
The development of a flexible budget requires more
time and effort than for the static budget process.
Furthermore, it requires close cooperation between finance and laboratory departments. Finance provides the
rules and general guidelines for the flexible budgeting
process and the laboratory provides the ability to apply
the guidelines in the highly technical work areas. Thus,
the success of the process depends on the ability of
finance to fine-tune the flexible budget models described
in the literature1 to the specific hospital environment
and on the ability of the laboratory manager to be
knowledgeable concerning cost behavior patterns in his
or her department.
Definitions
Because the terminology in the budgeting area is by
no means standard, the definitions of terms as used in
this article are provided below.
Received October 9, 1984; received revised manuscript and accepted
for publication November 30, 1984.
Address reprint requests to Dr. Pearson: University Hospital,
UCHSC—Box A022, 4200 East Ninth Avenue, Denver, Colorado
80262.
Central Laboratory and Financial Administration,
University
Hospital, University of Colorado Health Sciences Center,
Denver, Colorado
Direct cost: The cost clearly traceable to a unit of
activity or cost center. It includes specific and nonspecific
direct labor costs and specific and nonspecific direct
material costs.
Direct labor cost: The labor cost of actually performing
a test or procedure.
Direct materials cost: The cost of raw materials or
semifinished materials that can be traced to a test or
group of tests.
Nonspecific direct labor cost: The direct labor costs
that cannot be identified specifically with a test or test
group. These costs could be considered as indirect costs
within a laboratory section.
Nonspecific direct materials cost: The direct materials
costs that cannot be identified specifically with a test or
test group. These costs could be considered as indirect
costs within a laboratory section.
Fixed cost: That cost that is independent of the level
of activity.
Variable cost: That cost that varies more or less in
direct proportion to the level of activity.
Semifixed cost: Costs that change with level of activity
but not in direct proportion.
Semivariable cost: Costs that vary in direct proportion
to level of activity after a certain minimum has been
reached.
Marginal cost: The added cost of performing one
additional test without additional fixed cost investments.
Indirect cost: That cost not clearly traceable to a unit
of activity or a cost center, such as general administration.
Static budget: A budget projecting expenses at a single
normative level of workload activity.
Flexible budget: A budget projecting expenses at
various levels of workload activity.
Weighted units of measure (WUM): A weighted unit
of measurement quantifies the relative difference in
utilization of resource among similar, though different,
tests. The weighted units of measure (or relative value
units) were developed from variable labor and supply
expenses directly identifiable with specific tests or procedures.
202
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FLEXIBLE BUDGETING FOR COST CONTAINMENT
Table 1. Flow Chart of the Steps Required for the
Flexible Budgeting Process
List the tests and procedures performed in the laboratory
i
Determine the natural classification of expenses
Identifyfixedand variable direct materials cost for each test
Identifyfixedand variable labor costs for each test
Develop weighted units of measure for the variable
costs connected with each test
Determine total direct costs for each test
l
Develop budget projections for various levels of activity as needed
Monitor expenses against the budget adjusted for actual
weighted units of measure
Cost Behavior of Operating Expenses
There are four basic cost behavior patterns: (1) fixed;
(2) variable; (3) semifixed; and (4) semivariable. In our
initial development of the flexible budget, we treated all
expenses as either "fixed" or "variable" and did not use
the semifixed or semivariable categories. Some expenses
were identified as having both fixed and variable components. Specific examples will be given in the next
section.
Ideally, every cost is identified specifically for each
test or procedure done in the laboratory, rather than
nonspecifically against all laboratory procedures. This
becomes especially important in the flexible budgeting
process, where the accuracy of the weighted units of
measure (and thus their usefulness in projecting expenditure levels) depends on the completeness with which
specific costs are known. When we reviewed our budget,
we found that our expenses fell into two main categories:
(1) test-specific or test-group-specific costs that could
easily be identified, e.g., a reagent used for a specific
test or a maintenance contract for a specific instrument;
(2) non-specific costs that could not be identified as
belonging to a specific test but were of a general nature
or part of the laboratory overhead, e.g., cleaning supplies,
copy machine charges, request forms.
In addition, we identified a third, temporary category
of expense. This included test-specific or test-groupspecific costs that, because of the way purchases were
made or data was recorded, could not easily be identified
with specific categories. For the first year, these costs
were lumped in the nonspecific costs category and data
handling methods were improved so that these costs
could be identified against specific tests or test groups
in subsequent years. Examples included transfer pipets,
sample storage tubes, and certain control materials.
Development of the Flexible Budget
In spite of all of the directions, guidelines, etc., that
exist for the budgeting process, many decisions are
203
Table 2. Sample List of Tests and Procedures
Grouped by Test Group
Instrument or
Test Group
Astra®
Hitachi®
Flame
photometer
Osmometer
Isoenzymes
Electrophoresis
Test
Amylase
Calcium
Chloride
Albumin
ALT
AST
Bilirubin,
conjugated
Bilirubin, total
Cholesterol,
HDL
Lithium
Osmolality
CK
Isoenzymes
Protein
fractionation
Creatinine
Glucose
Potassium
Cholesterol,
total
CK.
GGT
LD
Magnesium
Phosphorus
Sodium
Urea
Phosphatase,
alkaline
Protein, total
Triglyceride
Uric acid
LD Isoenzymes
required on a detailed level as the process unfolds. Table
1 shows a flow chart of the budget process. Some of the
decisions and considerations required at each step are
discussed below.
List the Tests and Procedures Performed
by the Laboratory
All of the major production tasks of the laboratory
should be represented in this list. Frequently, the laboratory performs a combination of revenue and nonrevenue producing tasks. For example, phlebotomy may
represent a significant portion of work for a laboratory
section but may or may not be represented by a separate
charge.
Table 3. List of Expense Classifications Used for
Flexible Budgeting Purposes
Office supplies
'Request forms
General telephone
Pageboys
General postage
Printing services
Copy machine
General microfilm and photo
Subscriptions
General physical plant
maintenance
Building maintenance and
repair
Custodial and laundry services
Technical shop supplies
'Control sera
*Chem supplies—Astra
1
Med surg supplies—chem
Med surg supplies—glassware and
plastics
Med surg supplies—purchased
services
*Chem supplies—Hitachi
•Chem supplies—isoenzymes
*Chem supplies—protein
electrophoresis
*Chem supplies—aca®
pharmaceuticals
Gen equipment noncapital
Gen freight storage
Gen other operating expense
Equipment maintenance and repair
Represents new classifications created that are not from the standard finance department
PEARSON ET AL.
204
A.J.C.P. • August 1985
Table 4. Examples of a Worksheet for Recording Fixed and Variable Costs (dollars)
Test-Group-Specific
Direct Mat. Costs
Classification
Description
Copy machine
Subscription
Copy Machine
Surveys
Subscriptions
Rental Na/K
Rental CI
Rental C02
Rental BUN
Rental Creat
Rental Glu
Rental Ca
Rental Amy
Rental TestGrp
ESP rgt Na/K
ESP rgt CI
ESP rgt C02
ESP rgt BUN
ESP rgt Creat
ESP rgt Glu
ESP rgt Ca
ESP rgt Amy
Chem—Astra
Fixed
Variable
Test-Specific
Dir. Mat. Costs
Fixed
Variable
Nonspecific
Dir. Mat. Costs
Fixed
732
2,476
1,020
Variable
Subtotal
732
3,496
2,640
1,980
2,376
3,036
3,168
3,640
7,200
4,080
49,182
Many times tests may be ordered singly or as part of
an ordering panel. Since the costs for producing the
panels are determined at a test level, tests, not ordering
panels, should be represented in this list. The exception
would be for an instrument in which only full panels
are done and in which costs are determined at the panel
level.
When more than one test was performed on a single
instrument, we chose to group the tests together on the
list because it made handling of the costs easier. A
sample list is shown in Table 2.
Determine the Natural Classification of Expenses
Traditionally, the budget is segmented into categories
of expenses called "natural classifications." The ojective
of the natural classification is to group similar expenditures together, with the end result that the department
budget is neither too detailed nor,too summarized. This
grouping facilitates budget operations such as applying
corrections for inflation, since all items in a classification
are related.
During the flexible budget process, it is helpful to
create specific classifications (or subclassifications) for
each test or test group in the laboratory that is a major
expenditure. For example, "chemical supplies" can be
split into "chemical supplies—Astra," "chemical supplies—Hitachi," "chemical supplies—isoenzymes," etc.
The degree to which the classification groups can and
should be split must be the result of a compromise
between the finance department (how many categories
are needed or permitted?) and the laboratory (how much
effort is required to keep track of multiple categories vs.
5,040
6,989
3,920
19,321
7,661
15,300
0
8,064
143,597
how many dollars are involved?). In general, we found
that if a test or test group consumed more than 1 % of
our operating expense budget, it was helpful to establish
a new classification. A summary of classifications used
in our laboratory is shown in Table 3.
Identify Fixed and Variable Direct Materials Costs for
Each Test in the Laboratory
Since all of the expenditure reports from the finance
department are organized by natural classification (rather
than by test or instrument), it is best to allocate fixed
and variable expenses under these same classifications.
We analyzed our expenditures for each classification
code and used a worksheet and a log sheet to summarize
the basis for our decisions. We referred to our list of
tests and procedures as we reviewed each expenditure
in the laboratory. Examples are shown in Tables 4
and 5.
The source of budget information for the flexible
budget process was no different from that used in the
static budget process—it still consisted of a combination
of historic data, usage estimates, and actual cost data
for new and existing programs. As stated earlier, three
categories of fixed and variable expenses were identified:
(1) test-group-specific direct material cost; (2) test-specific
direct materials cost; and (3) nonspecific direct materials
cost. The test-group-specific costs were allocated to all
tests done in the test group by the ratio of total numbers
(based on the previous year's total counts). Test-specific
materials costs were allocated to each test. Nonspecific
direct materials costs were allocated to all tests by the
ratio of total test counts.
Vol. 84 • No. 2
FLEXIBLE BUDGETING FOR COST CONTAINMENT
205
Table 5. Logsheet with Descriptions of Fixed and Variable Costs
Overall Policy
The basis used for thefixedbudget for all expenses is that one sample per test will be received per shift (or in the case of low volume tests,
one sample per day). Thus, the minimum supplies, equipment, technologists, etc.. that must be included infixedcosts are those needed to
do the "one of each test." All remaining supplies that are directly test-related will be considered variable.
Classification
Copy Machine: Historic data show that expenditures for the copy machine remain essentially constant and are afixedpart of doing business.
Subscriptions: Historic data used to estimate expenditures of $2,476 for survey subscriptions and $1,020 for books and periodicals. These
costs are considered afixedpart of doing business.
Physical Plant Maintenance: Historical data show that expenditures for maintenance are essentially constant from year to year and are a fixed
part of doing business.
Chem Supplies—Astra: Actual cost data and projected estimates show that classification consists of bothfixedand variable expenses. The
rental agreement (Answerpak) is considered 100%fixedand will be coded against specific tests for the module costs and against the Astra
test group for the balance of the rental costs. The additional reagents purchased will be considered 100% variable.
Chem Supplies—Hitachi: Actual data and projected estimates show that reagent costs that are part of the matrix rental agreement are 100%
fixed; additional reagents are 100% variable. Test-group-specific items such as calibrator and reaction cell cuvettes that are used on a
scheduled basis are 100%fixed;sample cups, printer paper, and other volume-dependent consumables are estimated to be 10%fixedand
90% variable.
Identify Fixed and Variable Labor Costs for Each Test
in the Laboratory
A decision was made to consider the technologists
needed to staff the laboratory 24 hours a day for
minimal testing as "fixed." The number, 8.8 FTEs (full
time equivalent), included three technologists on day
shift, two on evening shift, and one on night shift, plus
minimal staffing on weekends. In addition, all (three)
supervisor FTEs were considered fixed, for a total of
11.8 fixed salaries. That left a total of 6.55 FTEs as
100% variable.
Laboratories usually use the CAP (College of American
Pathologists) workload recording method to determine
the amount of time required for the type of testing
performed. Since labor costs represent a significant
portion of laboratory expenses and since standards and
quality control (QC) samples may represent a significant
fraction of the overall test volume, it is critical that the
count of these tests be included in the test count and in
the overall cost for the tests.
Some modifications may be required to the CAP
workload figures. For example, the CAP units for tests
performed on multitest analyzers consist of a sample
setup component and a test performance component.
To simplify record keeping, we collected data for one
month and calculated an average CAP unit for these
tests. Values for methods not listed in the CAP workload
tables were determined by performing time studies in
the laboratory.
There are two methods that can be used to calculate
the variable labor costs:
Method 1. Establish the salary rate for a CAP unit
(minute) of work by assuming 100% efficiency, i.e., all
staff are productive at all times, and calculate the labor
cost for each test based on the corrected CAP units for
that test. The steps required are as follows:
(1) Determine the projected number of standard,
quality control, repeat, and billable samples for each
test and procedure.
(2) Identify the appropriate CAP workload units for
each test or procedure.
(3) Calculate the variable salary rate by dividing the
sum of the variable salaries by the number of variable
FTEs expressed in minutes.
(4) Calculate the corrected units of work/test by the
following formula: ([annual number of tests X CAP
workload units/test] + [annual number of QC, standards,
and repeats X CAP workload units/test]) divided by the
annual number of tests.
(5) Calculate the variable salary dollars per test by
multiplying the corrected units of work/test by variable
salary rate.
Method 2. Establish the labor cost for a test by
assuming that a certain staffing level is appropriate and
spreading the labor costs cross all tests as a ratio of the
CAP weight for that test to the CAP weight for all tests.
The steps required are as follows:
(1) Determine the projected number of standard,
quality control, repeat, and billable samples for each
test and procedure.
(2) Identify the appropriate CAP workload units for
each test or procedure.
(3) Calculate the sum of the variable salary dollars in
the laboratory budget.
(4) Calculate the corrected units of work/test by the
following formula: ([annual number of tests X CAP
workload units/test] + [annual number of QC, standards,
and repeats X CAP workload units/test]) divided by the
annual number of tests.
(5) Calculate the variable salary dollars allocated to
each test using the following formula: (total variable
salary dollars/total corrected units of work for all tests)
X (corrected units of work/test) = variable salary dollars
allocated/test.
PEARSON ET AL.
206
A.J.C.P. • August 1985
Table 6. Variable Labor Costs Calculated by Method 1 for Selected Tests
Test or Procedures
Astra
Amylase
Calcium
Hitachi
Albumin
Cholesterol, HDL
Annual No. of Tests
or Procedures
Annual No. of QC,
Stds, and Repeats
Cap Workload
Units/Test
Corrected Workload
Units/Test
Variable
Salary/Test*
6,633
12,683
3,980
7,610
0.6
0.6
0.96
0.96
0.20
0.20
7,703
145
4,622
87
0.8
6.0
1.28
9.6
0.27
2.05
* Variable salary rate calculated from Method 1, Step 3 equaled $0.21.
For administrative reasons, we used Method 1; Method
2 would be preferable because it gives a better indication
of the true variable labor cost per test. An example of a
variable labor cost worksheet is shown in Table 6.
Develop Weighted Units of Measure for the Variable
Costs Connected with Each Test
The totals for all variable test-group-specific costs and
test-specific costs can be obtained from the direct materials worksheets. The variable labor worksheets provide
information on the annual number of tests or procedures
and the variable salary dollars per test. The total direct
materials costs were converted to costs per test with the
use of the following formulas: (1) (Variable test-groupspecific cost per test) = (total variable test-group-specific
direct materials cost) divided by (total annual number
of tests or procedures in the test group); (2) (Variable
test-specific cost per test) = (total variable test-specific
direct materials cost) divided by (total annual number
of the specific test or procedure).
Since the finance department defined the weighted
unit of measure in terms of known variable costs per
test, we first summed the variable salary dollars per test,
the variable test-group-specific cost per test, and the
variable test-specific cost per test to obtain the total
known variable cost for each test. By choosing the test
or procedure with the lowest total known variable cost
per test and dividing all totals by this number, relative
value units or weighted units of measure were calculated
for each test. Of significance is the fact that relative
value units represent the total known, specifically identified variable costs for doing each test or procedure in
the laboratory, ranked relative to all other tests or
procedures. Remember, however, that there are other
variable costs of a general or nonspecific nature that are
not included, in addition to all fixed costs. An example
is shown in Table 7.
Determine Total Direct Costs for Each Test
This section draws on all of the previous work and
adds in the cost categories that have been set aside.
When the worksheet for this section is completed, all of
the direct expenditures for materials and labor will be
allocated; that is, summing the products of the total
direct cost per test times the number of tests for all tests
will equal the total operating expense budget.
The total direct cost for a test is the sum of the fixed
and variable specific materials and labor costs identified
for the test plus the fixed and variable nonspecific
materials and labor costs allocated to the test. The fixed
test-group-specific cost per test and fixed test-specific
cost per test were calculated as described above for their
variable counterparts. There was no fixed specific labor
cost, since we decided to treat all fixed labor costs as
nonspecific costs. The fixed nonspecific materials and
labor costs and the variable nonspecific materials costs
were allocated to all tests according to the following
formulas: (1) Fixed nonspecific materials cost per test
Table 7. Sample Worksheet for Calculating Weighted Units of Measure for Each Test
Test or Procedures
Astra
Amylase
Calcium
Hitachi
Albumin
Cholesterol, HDL
Variable TestGroup-Specific
Cost/Test
Variable
Test-Specific
Cost/Test
Variable
Salary/Test
Total Known
Variable Cost/Test
Weighted Units
of Measure
0.02
0.02
1.22
0.00
0.20
0.20
1.44
0.22*
6.5
1.0
0.03
0.03
0.01
0.00
0.27
2.05
0.31
2.08
1.4
9.4
* Calcium represents the test with the lowest total known variable cost per test. Each total is divided by the calcium variable cost ($0.22) to obtain the weighted units of measure.
207
FLEXIBLE BUDGETING FOR COST CONTAINMENT
Vol. 84 . No. 2
Table 8. Worksheet for Calculating Total Direct Cost for Each Test
Test or
Procedure
Amylase
Calcium
Albumin
Cholesterol,
HDL
Total
Known
Variable
Cost/Test
Fixed
Test-GroupSpecific
Cost/Test
Fixed
Test-Specific
Cost/Test
Variable
Nonspecific
Material
Cost/Test
Fixed
Nonspecific
Material
Cost/Test
Fixed
Nonspecific
Labor
Cost/Test
Total
Direct
Cost/Test
Total
Direct
Variable
Cost/Test
1.44
0.22
0.31
0.22
0.22
0.07
0.62
0.57
0.09
0.11
0.02
0.02
0.21
0.03
0.04
1.78
0.27
0.38
4.38
1.33
0.91
1.55
0.24
0.33
2.08
0.07
0.00
0.16
0.30
2.57
5.18
2.24
= (total fixed nonspecific materials cost) divided by
(total weighted units of measure for all tests) X (weighted
unit of measure for the test). (2) Fixed nonspecific labor
cost per test = (total fixed nonspecific labor cost) divided
by (total weighted units of measure for all tests)
X (weighted unit of measure for the test). (3) Variable
nonspecific materials cost per test = (total variable nonspecific materials cost) divided by (total weighted units
of measure for all tests) X (weighted unit of measure for
the test).
An example is shown in Table 8.
Develop Projections for Various Levels of Activity
as Needed
Once the static budget was determined and approved,
budget plateau levels were established for changes in
workload from - 3 0 to +10%. The plateau levels represented percent changes in weighted units of measure,
not changes in counts of tests. By definition, the changes
in workload impact the variable portions of the budget
but not the fixed portions. For example, for a plateau
level of —10% weighted units, the variable portion of
the budget was reduced 10% but the fixed portion did
not change. At -20%, the variable portion of the budget
was reduced 20% (e.g., by lay off of variable salary
personnel and reduction in supplies), but the fixed
portion did not change.
Because so much of the total cost of a laboratory is
classified as fixed, the savings projected are rather small
but are realistic. For example, if a 10% decrease in
amylase tests is projected, we can use the data in Table
8 to calculate the projected savings by using the following
formula: Projected savings = (number of tests not done)
X (total direct variable cost per test).
In the example for amylase, projected savings = 663
X $1.55 = $1,028.
Contrast this figure with what might be projected if
the nature of the costs was less well understood. In such
an environment, a formula such as the following might
be used: Projected savings = (number of tests not done)
X (total direct cost per test).
Again, for the amylase example, projected savings
= 663 X $4.38 = $2,904. Projections such as this are
not realistic, and such high savings cannot be realized.
Monitor Expenses Against Budget Adjusted for Actual
Weighted Units of Measure
In the static budget process, the budgeted expenditure
levels can be allocated among the calendar months as
desired, but the total budgeted dollars do not change
when the workload changes. In the flexible budget,
budgeted expenditure levels for fixed expenses can be
allocated among the calendar months as desired, but
the variable expenses must be allocated based on the
observed WUM for each time period.
Monitoring expenses on a monthly basis is difficult
because expenses tend to occur relative to when an
order was placed and are not related necessarily to the
workload experienced over the month. Over a longer
time period such as 6-12 months, though, the expenditures and weighted units of measure should come together. We have developed a simplified manual accounting system that duplicates the Hospital's financial reporting system for the purpose of attempting to associate
expenditures with workload over shorter periods of time.
It is too early to tell if this effort is worthwhile.
Discussion of Flexible Budgeting Process
Like all new management tools, the flexible budgeting
process is undergoing a "growth and change" phase as
our level of experience with it changes. The process has
several clear-cut advantages—and also some areas that
require further work and definition.
The flexible budgeting process provides a format
under which each operating cost is defined and categorized. Once the cost behavior of each operating expense
is known and the component expenses that make up
laboratory costs are defined, the information can be
used for a variety of purposes including the following:
(1) determining price structure; (2) providing input into
diagnostic related groups (DRGs), and (3) initiating
tighter control of variable-cost inventory items.
208
PEARSON ET AL.
The support systems and processes in the hospital
often must be adapted to provide the data in more
usable and timely ways. For example, the laboratory's
current inventory system does not permit easy coding
of costs by test, test group, or nonspecific categories,
nor does it permit identification of specific costs as fixed
or variable. The hospital financial system monitors
expenses by the natural classification codes, and each
expenditure is allocated into fixed and variable categories
by an average percentage rather than specific allocations.
In addition, the laboratory has many expenses that really
are semifixed or semivariable, and no mechanism exists
presently to recognize this.
One problem we encounter while monitoring expenditures occurs because of delays in processing orders
and because some orders are shipped quarterly or bimonthly. This may cause a significant lag in the appearance of some costs on expense reports and a significant lead in the appearance of other costs. Furthermore,
since the amount of supplies in inventory must be
sufficient to cover increases in work and delays in
ordering, there is a natural imbalance between ordering
and consumption. The monitoring system presently
used is such that expenses are recognized only when
paid. We are evaluating a modified accrual accounting
system for monitoring purposes, whereby expenses are
recognized when resources are consumed. Such a system
should provide data that are more in tune with the level
of activity.
The flexible budget represents many compromises
negotiated, not only for budgetary purposes, but also as
part of laboratory operations. For instance, the nonspecific variable and fixed costs are spread to all tests, based
on the relative weights for the test. This means that
supervisor time will be weighted more heavily to BUN
than to Na because the reagent is more expensive, even
though the amount of supervisor time may not differ.
Consider the trade offs made when supplies are purchased. Many reagents in the laboratory are ordered
A.J.C.P. • August 1985
under special contracts, whereby the price is guaranteed
in return for a fixed volume order. Thus, these reagents
are part of the fixed operating expense. If significant
workload decreases are anticipated, it might be advantageous to increase the variable cost component and to
sacrifice price discounts.
The flexible budget process provides the laboratory
manager and hospital administration with several significant benefits. Knowledge of departmental cost behavior patterns is critical to effective and efficient resource
management. Expenditures are based on predetermined
cost behavior patterns identified by laboratory managers
for various levels of activity. Thus, cost and accountability are based on actual performance achieved and
not on an expected or normal level. Knowledge of the
fixed and variable cost components of tests lends itself
to the use of marginal or incremental analysis. Marginal
analysis involves determining the relationship between
price, variable costs, fixed costs, and volume, which will
aid management decision making and profitability analysis. This could eventually lead to a significant competitive advantage for the laboratory and the hospital.
Clearly there are costs associated with the flexible
budget process. There is a large investment of time up
front to identify, analyze, and categorize costs. It is
critical that managers be knowledgeable of cost accounting terms and technics. In order to implement the
flexible budget, it may be necessary to modify existing
information systems in order to match cost data and
activity data in a timely and accurate manner.
In today's world of scarce resources, limiting reimbursement policies, and competition, the information
available from a flexible budget clearly is essential for
management decision making.
Reference
1. Suver JD, Neumann BR: Standard costs for healthcare providers.
Hospital Financial Management 1981; 35:32-36