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		2,100			10,500			12,600
Estimated fixed overhead cost	$	3,347,400		$	8,704,500		$	12,051,900
Estimated variable overhead cost per patient-day	$	257		$	122

	Patient A			Patient B
Direct materials	$	4,600		$	6,300
Direct labor	$	25,250		$	36,200
Total number of patient-days (including ICU)		10			15
Number of patient-days spent in ICU		0			3

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.

Answer 1

1a
Estimated fixed overhead cost	12051900
Estimated variable overhead cost	1820700	=(2100*257)+(10500*122)
Estimated total overhead cost	13872600
Divide by Total Estimated number of patient-days	12600
The predetermined overhead rate	1101	per patient day
b
	Patient A
Direct materials	4600
Direct labor	25250
Applied overhead	11010	=10*1101
Total cost for Patient A	40860
	Patient B
Direct materials	6300
Direct labor	36200
Applied overhead	16515	=15*1101
Total cost for Patient B	59015
2a
Estimated fixed overhead cost	3347400
Estimated variable overhead cost	539700	=2100*257
Estimated total overhead cost	3887100
Divide by Estimated number of patient-days	2100
Predetermined ICU overhead rate	1851	per patient day
Estimated fixed overhead cost	8704500
Estimated variable overhead cost	1281000	=10500*122
Estimated total overhead cost	9985500
Divide by Estimated number of patient-days	10500
Predetermined Other overhead rate	951	per patient day
b
	Patient A
Direct materials	4600
Direct labor	25250
Applied overhead	9510	=10*951
Total cost for Patient A	39360
	Patient B
Direct materials	6300
Direct labor	36200
Applied overhead	16965	=(3*1851)+(12*951)
Total cost for Patient B	59465