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: Estimated number of patient-days Estimated fixed overhead cost Estimated variable overhead cost per patient-day ICU 3,700 $6,119,800 305 Other 22,200 $23, 110,200 $ 99 Total 25,900 $29, 230,000 Direct materials Direct labor Total number of patient-days (including ICU) Number of patient-days spent in ICU Patient a Patient B $ 6,200 $ 7,900 $ 29,250 $ 39, 400 26 31 19 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, includina direct materials, direct labor and applied overhead, assigned to Patient A and Patient B.

Answer 1

Part 1 a

ICU
Estimated fixed overhead	6119800
Estimated variable overhead (3700*305)	1128500
Estimated total overhead cost	$7248300

Other
Estimated fixed overhead	23110200
Estimated variable overhead (22200*99)	2197800
Estimated total overhead cost	$25308000

Estimated total overhead cost = 7248300+25308000 = $32556300

Estimated total overhead (a)	32556300
Estimated total patient-days (b)	25900
Predetermined overhead rate (a / b)	$1257 per patient day

Part 1 b

	Patient A	Patient B
Direct materials	6200	7900
Direct labor	29250	39400
Overhead applied (1257*26); (1257*31)	32682	38967
Total cost	$68132	$86267

Part 2 a

ICU
Estimated fixed overhead	6119800
Estimated variable overhead (3700*305)	1128500
Estimated total overhead cost	$7248300
Estimated total overhead cost (a)	$7248300
Estimated total patient days (b)	3700
Predetermined overhead rate (a / b)	$1959 per patient day

Other
Estimated fixed overhead	23110200
Estimated variable overhead (22200*99)	2197800
Estimated total overhead cost	$25308000
Estimated total overhead cost (a)	$25308000
Estimated total patient days (b)	22200
Predetermined overhead rate (a / b)	$1140 per patient day

Part 2 b

	Patient A
Direct materials	6200
Direct labor	29250
ICU (1959*0)	0
Overhead applied (1140*26)	29640
Total cost	$65090

	Patient B
Direct materials	7900
Direct labor	39400
ICU (1959*19)	37221
Overhead applied (1140*12)	13680
Total cost	$98201