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Does it pay to outsource?

To make an intelligent comparison of an in-house laundry with outside rental service, you should be aware of all costs involved. Hospitals readily recognize certain direct costs such as laundry labour and supervision, washing supplies and linen replacement costs.

These, however, represent only part of the total cost of operations. Other costs are frequently overlooked and must be allocated to the in-house laundry, such as: fuel, electricity, housekeeping, office and administration. Through methodical cost accounting procedures, all of the direct and allocable costs relating to the laundry operation are accumulated and ultimately reduced to linen cost per lb. and per patient day-the familiar units of linen cost in the hospital.

In comparing costs of in-house vs. outside linen supply service, a test period of two to four weeks should be identified. Item counts of clean linen produced by the hospital laundry should be made. Caution should be taken that re-washed or rejected items should not be counted twice.

Counts of clean linen used by the healthcare facility should also be made and compared with production counts to verify the accuracy of production figures. The average weight of each item processed should be determined by individually weighing, for each item, a bundle of 10 pieces of clean linen.

The total pounds processed during the survey period can be calculated by multiplying the number of pieces of each item processed by its clean weight and totaling the resulting figures. The census for each day during the survey period should be obtained and compared with the average annual daily census.

This comparison will indicate whether the survey period is typical of the entire year, and consequently, if the quantity of linens produced is typical. In periods of high activity, laundry costs per pound will be lower than average since fixed costs will be spread over more units. Conversely, costs per pound will be higher in periods of low activity.

Determining need

There are a number of reasons why a hospital might swap its in-house laundry for an outside service. These include:

• The healthcare provider does not make a capital outlay for linen
• Unseen costs disappear with awareness in applicable charges
• An ample supply of linens and specialty items becomes increasingly available
• A profit center from hospital space is currently occupied by a cost center, namely a laundry
• Funds are tied up in laundry equipment and linens available for other uses
• A linen service provider understands textiles and is attuned to purchasing the correct types of textiles to meet specific needs
• A single linen service supplier has greater purchasing power for linen items than several hospitals

Calculating cost

The first step in determining the full cost of operating the laundry is to set up a worksheet listing all the expenses that will be incurred for the test period. This includes expenses charged directly to the laundry or accumulated in a separate account to be later allocated to the laundry. A sort test period may result in distortions, with regard to some individual expenses. For example, repairs may be unusually high throughout the test period, or certain administrative costs may be unusually low. To reflect normal costs, compare each expense (particularly those allocable) for the period with year-to-date figures and/or most recent fiscal year, to determine if these are truly representative for the period.

Establishing Direct Costs

Direct costs are expenses that can be directly identified with the laundry and are immediately charged to laundry and linen service when incurred. The following are direct cost expenses:

Costs incurred for a short test period may not be a fair representation of actual costs over a longer period such as one year. A hospital may, for example, purchase a large quantity of linen during one month to replenish depleted stock, or take advantage of favorable purchase prices in the market.

To determine a representative cost for the survey period, calculate the average cost based on linen purchases over an extended period, say the past two or three years. To illustrate, the linen expense for three years-156 weeks x number of weeks in survey = the tentative average cost for the survey period. If the cost of merchandise has been increasing, it may be more accurate to increase the tentative cost by a factor of 5-15% to provide for the increase of linen cost.

Allocable Costs

Allocable costs are not as readily recognizable as part of the cost of operations by those not actually involved in cost accounting. The principal distinction between direct and allocable costs is not in the nature of these costs but in the accounting treatment. Allocable costs may have to await the application of the appropriate formula before being charged back. A further distinction can be made in that most direct costs are variable in nature and will fluctuate with the level of activity or production of the laundry. The allocable costs, on the other hand, are comprised of both variable and fixed costs.

Employee benefits The following procedures should be used to find the expense to be allocated to the laundry linen services:

• Obtain the figure for the total wages and salaries paid by the hospital in the most recent full year.
•List the detail of expenses and amounts for the year included in the employee benefits account (FICA, unemployment insurance, etc.).
• Adjust each of the expense items for increase in rates in the current year. For example, if the FICA rate increased by 5% over the prior, increase the FICA expense by 5%.
• Divide the total of employee benefits for the prior year (adjusted for rate changes obtained in step three) by the total hospital salaries and wages for the year in step one) This calculation will give you the percentage of employee benefits to total salaries and wages.
• Multiply all laundry and linen wages (including supervision and vacation, holiday, and sick pay) by the percentage obtained in step four to arrive at the portion of employee benefits to be allocated to the laundry and linen service.
• The other areas to be accounted for are Gas and/or oil, Water and sewage and Electricity. The other operating costs like plant engineer wages, payroll fringes of plant engineer’s wages, boiler & power plant repairs, boiler insurance, depreciation boiler and power plant should be allocated on the same basis as fuel

The following expenses should be allocated on the same basis as that of building depreciation (area of sq. ft.):

• Real estate taxes
• Property rentals: If fair rental is used in lieu of building depreciation, these costs should not be allocated to the laundry since they are presumed to be included in the rental
• Building repairs and maintenance wages
• Payroll fringes on building maintenance wages
• Insurance on buildings
• Security
• Housekeeping

Some other costs are under office fiscal and administrative services and cost of money committed to investment.

Extracted from TRSA Hospital Textile Cost manual

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Dow-Haier’s new pellet technology

Dow Chemicals along with Chinese appliances manufacturer Haier has announced a new washing technology called “Magic Pellets Washing”. The pellets are known to reduce water and detergent consumption substantially and improve the environmental & energy impact of clothes washing routine.

Haier and Dow scientists have been working for two years on this project. The pellets capture dirt from clothes by absorbing it, using only a small amount of water. These pellets are self-cleaning and reusable. Haier has also created a new washing machine to use the pellets with less water. The machine and pellets are estimated to save about 70 tonnes of water and 1,300 kilowatt-hours of electricity over the appliance’s lifetime, and a reduction in carbon dioxide emissions.

Mechanised laundry service at SR

In a bid to ensure pest free railway compartments and clean linen, the Southern Railway would soon open a mechanised laundry. Southern Railway is all set to open a mechanised laundry in Chennai in the next six months. The in house washing facility would improve the quality of linen in trains originating and terminating in Chennai.

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To make an intelligent comparison of an in-house laundry with outside rental service, you should be aware of all costs involved. Hospitals readily recognize certain direct costs such as laundry labour and supervision, washing supplies and linen replacement costs. These, however, represent only part of the total cost of operations. Other costs are frequently overlooked and must be allocated to the in-house laundry, such as: fuel, electricity, housekeeping, office and administration. Through methodical cost accounting procedures, all of the direct and allocable costs relating to the laundry operation are accumulated and ultimately reduced to linen cost per lb. and per…

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