While I can understand your surprise, Laurie, that such a seemingly straightforward procedure could cost this amount, and the discrepancy between this cost and the same procedure being performed at no cost elsewhere, I am with beautifulgirls on this one. Our own practice would charge significantly less for the same procedure but we are not skilled cytologists so the majority of our cytology cases would be referred direct to a pathologist (so saving some costs but adding some time to reaching a diagnosis).
Routine tests require facilities, equipment, consumables and expertise. Vets are notoriously bad businesspeople and frequently undercharge for their services in spite of the huge amounts of cash required to ensure they have the vital kit and personnel to be able to provide a good service. It sounds like your practice is run by someone with a bit more business sense than the average practitioner - unlike the other practice where they are performing tests for free and never recouping the cost of the microscope they spent thousands on, the vet who's done a cytology course at a cost of several hundred pounds, and the nurse's measly wage!
The argument is often raised that some vets overcharge in the case of insured animals. But on each insurance claim form there's a declaration section where the vet has to certify that the charges are the same as those routinely levied on uninsured animals. To inflate charges is fraudulent. But the whole point of insurance is to allow you, the owner, to have peace of mind and be able to afford "gold standard" treatment. So instead of vaguely saying "Well, it's probably just a fatty lump, we'll do nothing and see if it grows" and charging you £30 for the consultation, they can perform (more expensive) tests to get a precise diagnosis and then plan the best treatment accordingly. Isn't that what you want?
I firmly believe that routine tests and procedures should be charged for fairly but many clients fail to realise that this "bread and butter" work has to fund the provision of very advanced medical equipment (and skills) so that if your dog gets hurt or ill and needs the best care in an emergency, your vet is able to provide it. I think overall the service you describe is good and I am not exactly sure what the problem is, other than a fundamental lack of understanding of the costs involved with providing even a basic veterinary service.