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
a
Estimated variable overhead cost:
ICU	1128500	=3700*305
Other	2197800	=22200*99
Estimated fixed overhead cost	29230000
Total overhead cost	32556300
Divide by Estimated number of patient-days	25900
The predetermined overhead rate	1257	per patient-day
b
	Patient A	Patient B
Direct materials	6200	7900
Direct labor	29250	39400
Overhead:
26 X 1257	32682
31X 1257		38967
Total cost	68132	86267
2
a
Estimated variable overhead cost:
ICU	1128500
Estimated fixed overhead cost	6119800
Total overhead cost	7248300
Divide by Estimated number of patient-days	3700
Predetermined ICU overhead rate	1959	per patient-day
Estimated variable overhead cost:
Other	2197800
Estimated fixed overhead cost	23110200
Total overhead cost	25308000
Divide by Estimated number of patient-days	22200
Predetermined Other overhead rate	1140	per patient-day
b
	Patient A	Patient B
Direct materials	6200	7900
Direct labor	29250	39400
Overhead:
26 X 1140	29640
(19 X 1959) + (12 X 1140)		50901
Total cost	65090	98201