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

2,300

4,600

6,900

Estimated fixed overhead cost

$

4,158,400

$

4,830,000

$

8,988,400

Estimated variable overhead cost per patient-day

$

301

$

120

Patient A

Patient B

Direct materials

$

4,800

$

6,500

Direct labor

$

25,750

$

36,600

Total number of patient-days (including ICU)

12

17

Number of patient-days spent in ICU

0

5

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.)

1a.

Predetermined overhead rate

per patient-day

1b.

Total cost for patient A

Total cost for patient B

2a.

Predetermined ICU overhead rate

per patient-day

Predetermined Other overhead rate

per patient-day

2b.

Total cost for patient A

Total cost for patient B

Solutions

Expert Solution

Solution 1a:

Predetermined overhead rate = Estimated overhead / Estimated patient days

= (2300*$301 + 4600*$120 + $8,988,400) / 6900 = $1,483 per patient day

solution 1b:

Computation of Cost Assigned to Patient
Particulars Patient A Patient B
Direct materials $4,800.00 $6,500.00
Direct labor $25,750.00 $36,600.00
Overhead applied $17,796.00 $25,211.00
Total costs $48,346.00 $68,311.00

Solution 2a:

Computation of Predetermined overhad rate
Particulars ICU Others
Variable overhead $692,300.00 $552,000.00
Fixed overhead $4,158,400.00 $4,830,000.00
Total overhead $4,850,700.00 $5,382,000.00
Estimated patient day 2300 4600
Overhead rate per patient day $2,109.00 $1,170.00

Solution 2b:

Computation of Cost Assigned to Patient
Particulars Patient A Patient B
Direct materials $4,800.00 $6,500.00
Direct labor $25,750.00 $36,600.00
Overhead applied - ICU $0.00 $10,545.00
Overhead applied - Others $14,040.00 $14,040.00
Total costs $44,590.00 $67,685.00


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