In: Accounting
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 | |||||
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. |
Part a:
The predetermined overhead rate |
|
Total estimated number of patient days |
29700 |
Total estimated fixed overhead cost |
31241100 |
Pre-determined overhead rate |
$1051.889 per patient day |
Part b. |
||||
Assuming that patient A has spent 2 days and Patient V has spent 3 days in the hospital |
||||
Patient A (Assuming ICU patient) |
2103.778 |
Patient B (Assuming other patient) |
||
direct variable costs |
516 |
direct variable costs |
312 |
|
The overhead cost allocation to the patient: |
2103.778 |
The overhead cost allocation to the patient: |
3155.667 |
|
Total cost of patient A |
4723.556 |
Total cost of patient B |
3467.667 |
ICU and other overhead rate |
||
Overhead rates of ICU and Other: |
||
ICU |
Other |
|
Estimated number of patient days |
3300 |
26400 |
Estimated fixed overhead cost |
5553900 |
25687200 |
Overhead rate |
$1683 per patient day |
$973 per patient day |
ICU and other overhead rate |
||
Overhead rates of ICU and Other: |
||
ICU |
Other |
|
Estimated number of patient days |
3300 |
26400 |
Estimated fixed overhead cost |
5553900 |
25687200 |
Overhead rate |
$1683 per patient day |
$973 per patient day |
Assuming that patient A has spent 2 days and Patient V has spent 3 days in the hospital |
||||
Part d. |
||||
Patient A (Assuming ICU patient) |
Patient B (Assuming other patient) |
|||
direct variable costs |
516 |
direct variable costs |
312 |
|
The overhead cost allocation to the patient: |
3366 |
The overhead cost allocation to the patient: |
2919 |
|
Total cost |
3882 |
Total cost |
3231 |