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		3,700			22,200			25,900
Estimated fixed overhead cost	$	6,119,800		$	23,110,200		$	29,230,000
Estimated variable overhead cost per patient-day	$	305		$	99

	Patient A			Patient B
Direct materials	$	6,200		$	7,900
Direct labor	$	29,250		$	39,400
Total number of patient-days (including ICU)		26			31
Number of patient-days spent in ICU		0			19

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 other intermediate calculations and final answers to the nearest whole dollar amount.)

Answer 1

1) predetermined overhead rate = Total cost/Total number of patient days

a

	Total
Fixed cost	$29,230,000
Variable costs	$3,326,300‬[$305*3,700]+[$99*22,200]
Total		$32,556,300
estimated patient days		25,900
Pre determined OH rate		$1,257

1b)

	Patient A	B
Direct material	$6,200	$7,900
Direct labor	$29,250	$39,400
OH allocated	$32,682[$1,257*26 days]	$38,967[$1,257*31 days]
Total cost	$68,132	$86,267

2)

	ICU	Other
Variable	$305	$99
Fixed	$1,654[$6,119,800/3,700]	$1,041[$23,110,200/22,200]
Total pre determined OH	$1,959[305+1654]	$1,140[99+1041]

2B) Total cost

	Patient A	B
Direct material	$6,200	$7,900
Direct labor	$29,250	$39,400
OH allocated (ICU)	$0	$37,221[$1959*19days]
OH allocated (Other)	$29,640[$1,140*26]	$13,680[$1,140* (31-19)]
Total cost	$65,090	$98,201

Please upvote if you find this helpful. In case of query please comment.