Question

McCullough Hospital uses a job-order costing system to assign costs to its patients. Its direct materials include a variety of items such as pharmaceutical drugs, heart valves, artificial hips, and pacemakers. Its direct labor costs (e.g., surgeons, anesthesiologists, radiologists, and nurses) associated with specific surgical procedures and tests are traced to individual patients. All other costs, such as depreciation of medical equipment, insurance, utilities, incidental medical supplies, and the labor costs associated with around-the clock monitoring of patients are treated as overhead costs.

Historically, McCullough has used one predetermined overhead rate based on the number of patient-days (each night that a patient spends in the hospital counts as one patient-day) to allocate overhead costs to patients. Recently a member of the hospital’s accounting staff has suggested using two predetermined overhead rates (allocated based on the number of patient-days) to improve the accuracy of the costs allocated to patients. The first overhead rate would include all overhead costs within the Intensive Care Unit (ICU) and the second overhead rate would include all Other overhead costs. Information pertaining to the hospital’s estimated number of patient-days, its estimated overhead costs, and two of its patients—Patient A and Patient B—is provided below:

	ICU			Other			Total
Estimated number of patient-days		3,300			26,400			29,700
Estimated fixed overhead cost	$	5,553,900		$	25,687,200		$	31,241,100
Estimated variable overhead cost per patient-day	$	258		$	104

	Patient A			Patient B
Direct materials	$	5,800		$	7,500
Direct labor	$	28,250		$	38,600
Total number of patient-days (including ICU)		22			27
Number of patient-days spent in ICU		0			15

Required:

1. Assuming McCullough uses only one predetermined overhead rate, calculate:

a. The predetermined overhead rate.

b. The total cost, including direct materials, direct labor and applied overhead, assigned to Patient A and Patient B.

2. Assuming McCullough calculates two overhead rates as recommended by the staff accountant, calculate:

a. The ICU and Other overhead rates.

b. The total cost, including direct materials, direct labor and applied overhead, assigned to Patient A and Patient B.

(Round "Predetermined overhead rate" to 2 decimal places. Round your intermediate calculations and final answers to the nearest dollar amount.)

	1a. Predetermined overhead rate per patient-day 1b. Total cost for patient A Total cost for patient B 2a. Predetermined ICU overhead rate per patient-day Predetermined Other overhead rate per patient-day 2b. Total cost for patient A Total cost for patient B

Answer 1

1a
Estimated fixed overhead cost	31241100
Estimated variable overhead cost	3597000	=(3300*258)+(26400*104)
Estimated total overhead cost	34838100
Divide by Total Estimated number of patient-days	29700
The predetermined overhead rate	1173	per patient day
b
	Patient A
Direct materials	5800
Direct labor	28250
Applied overhead	25806	=22*1173
Total cost for Patient A	59856
	Patient B
Direct materials	7500
Direct labor	38600
Applied overhead	31671	=27*1173
Total cost for Patient B	77771
2a
Estimated fixed overhead cost	5553900
Estimated variable overhead cost	851400	=3300*258
Estimated total overhead cost	6405300
Divide by Estimated number of patient-days	3300
Predetermined ICU overhead rate	1941	per patient day
Estimated fixed overhead cost	25687200
Estimated variable overhead cost	2745600	=26400*104
Estimated total overhead cost	28432800
Divide by Estimated number of patient-days	26400
Predetermined Other overhead rate	1077	per patient day
b
	Patient A
Direct materials	5800
Direct labor	28250
Applied overhead	23694	=22*1077
Total cost for Patient A	57744
	Patient B
Direct materials	7500
Direct labor	38600
Applied overhead	42039	=(15*1941)+(12*1077)
Total cost for Patient B	88139