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		2,600			5,200			7,800
Estimated fixed overhead cost	$	4,651,400		$	4,248,400		$	8,899,800
Estimated variable overhead cost per patient-day	$	239		$	110

	Patient A			Patient B
Direct materials	$	5,100		$	6,800
Direct labor	$	26,500		$	37,200
Total number of patient-days (including ICU)		15			20
Number of patient-days spent in ICU		0			8

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	8899800
Estimated variable overhead cost	1193400	=(2600*239)+(5200*110)
Estimated total overhead cost	10093200
Divide by Total Estimated number of patient-days	7800
The predetermined overhead rate	1294	per patient day
1b
	Patient A
Direct materials	5100
Direct labor	26500
Applied overhead	19410	=15*1294
Total cost for Patient A	51010
	Patient B
Direct materials	6800
Direct labor	37200
Applied overhead	25880	=20*1294
Total cost for Patient B	69880
2a
Estimated fixed overhead cost	4651400
Estimated variable overhead cost	621400	=2600*239
Estimated total overhead cost	5272800
Divide by Estimated number of patient-days	2600
Predetermined ICU overhead rate	2028	per patient day
Estimated fixed overhead cost	4248400
Estimated variable overhead cost	572000	=5200*110
Estimated total overhead cost	4820400
Divide by Estimated number of patient-days	5200
Predetermined Other overhead rate	927	per patient day
2b
	Patient A
Direct materials	5100
Direct labor	26500
Applied overhead	13905	=15*927
Total cost for Patient A	45505
	Patient B
Direct materials	6800
Direct labor	37200
Applied overhead	27348	=(8*2028)+(12*927)
Total cost for Patient B	71348