Question

Problem 3-20 (Algo) Plantwide versus Multiple Predetermined Overhead Rates: Service Industry [LO3-1, LO3-2, LO3-3, LO3-4]

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		2,500			22,500			25,000
Estimated fixed overhead cost	$	4,122,500		$	22,005,000		$	26,127,500
Estimated variable overhead cost per patient-day	$	286		$	117

	Patient A			Patient B
Direct materials	$	5,000		$	6,700
Direct labor	$	26,250		$	37,000
Total number of patient-days (including ICU)		14			19
Number of patient-days spent in ICU		0			7

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 your intermediate calculations and final answers to the nearest dollar amount.)

Answer 1

1a
Estimated fixed overhead cost	26127500
Estimated variable overhead cost	3347500	=(2500*286)+(22500*117)
Estimated total overhead cost	29475000
Divide by Total Estimated number of patient-days	25000
The predetermined overhead rate	1179	per patient day
b
	Patient A
Direct materials	5000
Direct labor	26250
Applied overhead	16506	=14*1179
Total cost for Patient A	47756
	Patient B
Direct materials	6700
Direct labor	37000
Applied overhead	22401	=19*1179
Total cost for Patient B	66101
2a
Estimated fixed overhead cost	4122500
Estimated variable overhead cost	715000	=2500*286
Estimated total overhead cost	4837500
Divide by Estimated number of patient-days	2500
Predetermined ICU overhead rate	1935	per patient day
Estimated fixed overhead cost	22005000
Estimated variable overhead cost	2632500	=22500*117
Estimated total overhead cost	24637500
Divide by Estimated number of patient-days	22500
Predetermined Other overhead rate	1095	per patient day
b
	Patient A
Direct materials	5000
Direct labor	26250
Applied overhead	15330	=14*1095
Total cost for Patient A	46580
	Patient B
Direct materials	6700
Direct labor	37000
Applied overhead	26685	=(7*1935)+(12*1095)
Total cost for Patient B	70385