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 25, e00 $26,127,500 Estimated number of patient-days Estimated fixed overhead cost 2,500 $ 4,122,500 22,500 $22,005, 000 Estimated variable overhead cost per patient-day 286 117 Patient A Patient B $ 6,700 $ 37,000 Direct materials 5,e00 $ 26,250 Direct labor Total number of patient-days (including ICU) Number of patient-days spent in ICU 14 19 Requlred: 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 declmal places. Round other Intermedlate calculatlons 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 per patient-day 2a. Predetermined ICU overhead rate per patient-day Predetermined Other overhead rate 2b. Total cost for patient A Total cost for patient B

Answer 1

1. Calculation of the predetermined overhead rate and Total Cost when single predetermined overhead rate : a. Determination of the Total Overheads and Pre-determined Overhead Rate Particulars ICU Other Total Fixed Overhead Cost $ 41,22,500 $ 2,20,05,000 $ 2,61,27,500 Variable Overhead Cost : - No. of Patient Days 2,500 22,500 - Cost per Patient Day 286 $ 117 - Variable Overhead Cost $ 7,15,000 $ 26,32,500 $ 33,47,500 Total Overhead Cost $ 2,94,75,000 Total Patient Days 2,500 22,500 25,000 Pre-determined Overhead Rate ($ 29,475,000 / 25,000 Hours) $ 1,179 b. Total Cost for Patient A and Patient B Particulars Direct Materials Direct Labor Overheads : - Patient Days - Overhead Cost @ $ 1,179 per day Total Cost Patient A Patient B 5,000 $ 6,700 $ 26,250 $ 37,000 A 14 16,506 47,756 A 19 22,401 66,101 $ $ $

2. Calculation of the predetermined overhead rate and Total Cost when two overhead rates are used : a. Determination of the Total Overheads and Pre-determined Overhead Rate Particulars ICU Other Fixed Overhead Cost (A) $ 41,22,500 $ 2,20,05,000 Variable Overhead Cost : - No. of Patient Days (i) 2,500 22,500 - Cost per Patient Day (ii) 286 117 - Variable Overhead Cost (B) = (i * ii) $ 7,15,000 $ 26,32,500 Total Overhead Cost (C) = (A + B) $ 48,37,500 $2,46,37,500 Total Patient Days (D) 2,500 22,500 Pre-determined Overhead Rate (C/D) $ 1,935 $ 1,095 6 $ Patient A Patient B 5,000 $ 6,700 $ 26,250 $ 37,000 b. Total Cost for Patient A and Patient B Particulars Direct Materials Direct Labor Overheads - ICU : - Patient Days |- Overhead Cost @ $ 1,935 per day Overheads - Other : - Patient Days - Overhead Cost @ $ 1,095 per day Total Cost 13,545 14 15,330 46,580 $ $ 12 13,140 70,385 $