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 (eg, 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: Estimated number of patient-days Estimated fixed overhead cost Estimated variable overhead cost per patient-day ICU 3,500 $ 5,460, $ 303 Other 17,500 $16,327,500 $ 108 Total 21,00 $21,787,500 Patient A $ 6,000 $ 28,750 24 Patient B $ 7,700 $ 39,000 Direct materials Direct labor Total number of patient-days (including ICU) Number of patient-days spent in ICU 29 - 17

Answer 1

Answers are in yellow.

1a.

Total Variable Overhead
ICU	303*3500	1060500
Other	108*17500	1890000
	A	2950500
Total Fixed costs
ICU	Given	5460000
Other	Given	16327500
	B	21787500
	Total (A+B)	24738000
Total Patient Days	Given	21000
Predetermined O/H rate	2473800/21000	1178	Per patient day

1b.

	Patient A	Patient B
Direct material (given)	6000	7700
Direct labor (given)	28750	39000
Prime cost	34750	46700
Overhead
A (24+0)*1178	28272
B (29+17)*1178		54188
Total Cost Prime cost + overhead)	63022	100888

2a.

	ICU	Other
Total Fixed costs (given) (A)	5460000	16327500
Total Patient Days (given) (B)	3500	17500
So, Fixed cost per patient Day (A/B)	1560	933
Variable Cost per patient day (given)	303	108
Total Overhead Rate (Fixed + Variable)	1863	1041
	Per patient day	Per patient day

2b. A has zero ICU days. hence all 24 are other. Similarly B 17 ICU days. hence, 29-17 = 12 days are other.

	Patient A	Patient B
Direct material	6000	7700
Direct labor	28750	39000
Prime cost	34750	46700
Overhead
ICU: A - NIL, B - 1863*17	0	31671
Other: A - (24*1041), B - ((29-17)*1041)	24984	12492
Total (Prime cost+ Overhead)	59734	90863

Please comment in case of any query regarding the solution.