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 the 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		3,500			17,500			21,000
Estimated fixed overhead cost	$	5,460,000		$	16,327,500		$	21,787,500
Estimated variable overhead cost per patient-day	$	303		$	108

	Patient A			Patient B
Direct materials	$	6,000		$	7,700
Direct labor	$	28,750		$	39,000
Total number of patient-days (including ICU)		24			29
Number of patient-days spent in ICU		0			17

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

Answer 1.
Part (a)	One Predetermined Overhead Rate
	Estimated Fixed Overhead Cost	21787500
	Estimated number of Patient Days	21000
	Predetermined Overhead Rate	1037.50
Part (b)	Total Cost for Patient A and Patient B
	Particulars	Patient A	Patient B
	Direct Material	6000	7700
	Direct Labour	28750	39000
	Variable Overhead Cost
	ICU Overhead	0	5151
			(303*17)
	Other Overhead	2592	1296
		(108*24)	(108*12)
	Fixed Overhead	24900	30088
		(1037.50*24)	(1037.50*29)
	Total Cost	62242	83235
Answer 2.
Part (a)	Particulars	ICU	Others
	Estimated Fixed Overhead Cost	5460000	16327500
	Estimated number of Patient Days	3500	17500
	Overhead Rate	1560	933
Part (b)	Total Cost for Patient A and Patient B
	Particulars	Patient A	Patient B
	Direct Material	6000	7700
	Direct Labour	28750	39000
	Variable Overhead Cost
	ICU Overhead	0	5151
			(303*17)
	Other Overhead	2592	1296
		(108*24)	(108*12)
	Fixed Overhead
	ICU Overhead	0	26520
			(17*1560)
	Other Overhead	22392	11196
		(933*24)	(933*12)
	Total Cost	59734	90863