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 3,400 27,200 30,600 Estimated fixed overhead cost $ 5,375,400 $ 21,678,400 $ 27,053,800 Estimated variable overhead cost per patient-day $ 291 $ 112 Patient A Patient B Direct materials $ 5,900 $ 7,600 Direct labor $ 28,500 $ 38,800 Total number of patient-days (including ICU) 23 28 Number of patient-days spent in ICU 0 16 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.)

Answer 1

1a
Estimated fixed overhead cost	27053800
Estimated variable overhead cost	4035800	=(3400*291)+(27200*112)
Estimated total overhead cost	31089600
Divide by Total Estimated number of patient-days	30600
The predetermined overhead rate	1016	per patient day
b
	Patient A
Direct materials	5900
Direct labor	28500
Applied overhead	23368	=23*1016
Total cost for Patient A	57768
	Patient B
Direct materials	7600
Direct labor	38800
Applied overhead	28448	=28*1016
Total cost for Patient B	74848
2a
Estimated fixed overhead cost	5375400
Estimated variable overhead cost	989400	=3400*291
Estimated total overhead cost	6364800
Divide by Estimated number of patient-days	3400
Predetermined ICU overhead rate	1872	per patient day
Estimated fixed overhead cost	21678400
Estimated variable overhead cost	3046400	=27200*112
Estimated total overhead cost	24724800
Divide by Estimated number of patient-days	27200
Predetermined Other overhead rate	909	per patient day
b
	Patient A
Direct materials	5900
Direct labor	28500
Applied overhead	20907	=23*909
Total cost for Patient A	55307
	Patient B
Direct materials	7600
Direct labor	38800
Applied overhead	40860	=(16*1872)+(12*909)
Total cost for Patient B	87260