Question

Problem 2-20 Plant wide versus Multiple Predetermined Overhead Rates: Service Industry [LO2-1, LO2-2, LO2-3, LO2-4]

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		2,200			8,800			11,000
Estimated fixed overhead cost	$	3,979,800		$	6,767,200		$	10,747,000
Estimated variable overhead cost per patient-day	$	241		$	116

	Patient A			Patient B
Direct materials	$	4,700		$	6,400
Direct labor	$	25,500		$	36,400
Total number of patient-days (including ICU)		11			16
Number of patient-days spent in ICU		0			4

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 _______

Answer 1

A	B	C	D	E	F	G	H	I	J
2
3			ICU	Other	Total
4		Estimated number of patient-days	2,200	8,800	11,000
5		Estimated fixed overhead cost	$3,979,800	$6,767,200	$10,747,000
6		Estimated variable overhead cost per patient-day	$241	$116
7
8			Patient A	Patient B
9		Direct materials	$4,700	$6,400
10		Direct labor	$25,500	$36,400
11		Total number of patient-days (including ICU)	11	16
12		Number of patient-days spent in ICU	0	4
13		Number of patient-days spent in Others	11	12	=E11-E12
14
15		1)
16
17		a)
18
19		Predetermined Overhead rate	=Estimated Total Fixed Manufacturing Overhead / Estimated Total patient days
20			$977.00	=F5/F4
21
22		Hence Predetermined Overhead rate is	$977.00
23
24		1 b)
25
26			Patient A	Patient B
27		Total number of patient-days (including ICU)	11	16
28		Predetermined Overhead rate	$977	$977
29		Overhead Cost	$10,747	$15,632	=E27*E28
30
31			Patient A	Patient B
32		Direct materials	$4,700	$6,400
33		Direct labor	$25,500	$36,400
34		Overhead Cost	$10,747	$15,632
35		Total cost	$40,947	$58,432	=SUM(E32:E34)
36
37		Hence
38		Total cost to patient A is	$40,947
39		Total cost to patient B is	$58,432
40
41		2a)
42
43		Departmental overhead rate	=Total department overhead cost / Total patient days in department
44
45			ICU	Other
46		Estimated number of patient-days	2,200	8,800
47		Estimated fixed overhead cost	$3,979,800	$6,767,200
48		Departmental overhead rate	$1,809	$769	=E47/E46
49
50		Hence
51		ICU Overhead rate is	$1,809
52		Other Overhead rate is	$769
53
54		2b)
55
56			Patient A	Patient B
57		Total number of patient-days (including ICU)	11	16
58		Predetermined Overhead rate	$1,809	$769
59		Overhead Cost	$19,899	$12,304	=E57*E58
60
61			Patient A	Patient B
62		Direct materials	$4,700	$6,400
63		Direct labor	$25,500	$36,400
64		Overhead Cost	$19,899	$12,304
65		Total cost	$50,099	$55,104	=SUM(E62:E64)
66
67		Hence
68		Total cost to patient A is	$50,099
69		Total cost to patient B is	$55,104
70