Question

In: Accounting

McCullough Hospital uses a job-order costing system to assign costs to its patients. Its direct materials...

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.

Solutions

Expert Solution

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


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