Question

Problem 6-56 (Static) Two-Stage Allocation and Product Costing (LO 6-5)

Owl-Eye Radiologists (OR) does various types of diagnostic imaging. Radiologists perform tests using sophisticated equipment. OR's management wants to compute the costs of performing tests for two different types of patients: those who are hospitalized (including those in emergency rooms) and those who are not hospitalized but are referred by physicians. The data for June for the two categories of patients follow.

	Hospital Patients			Other Patients			Total
Units (i.e., procedures) produced		640			860			1,500
Equipment-hours used		240			120			360
Direct labor-hours		480			180			660
Direct labor costs	$	38,400		$	10,800		$	49,200
Overhead costs							$	49,560

The accountant first assigns overhead costs to two pools: overhead related to equipment-hours and overhead related to labor-hours. The analysis of overhead accounts by the cost accountant follows.

Account	Amount			Related to
Utilities	$	4,800		Equipment-hours
Supplies		12,600		Labor-hours
Indirect labor and supervision		20,400		Labor-hours
Equipment depreciation and maintenance		8,400		Equipment-hours
Miscellaneous		3,360		Equipment-hours

Required:

a. Compute the predetermined overhead rates assuming that Owl-Eye Radiologists uses equipment-hours to allocate equipment-related overhead costs and labor-hours to allocate labor-related overhead costs.

b. Compute the total costs of production and the cost per unit for each of the two types of patients undergoing tests in June.

Answer 1

a) Predetermine overhead rate :

Equipment related overhead cost = (4800+8400+3360)/360 = 46 per equipment hour

Labor hour related overhead cost = (12600+20400)/660 = 50 per labor hour

b) Calculate total production cost and cost per unit

	Hospital patients	Other patients
Direct labor	38400	10800
Equipment related overhead	11040	5520
Direct labor hour related overhead	24000	9000
Total cost of production	73440	25320
Unit	640	860
Unit cost	114.75	29.44