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		2,500			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 other intermediate calculations and final answers to the nearest whole dollar amount.)

Answer 1

1. Assuming McCullough uses only one predetermined overhead rate

a. Computation of predetermined overhead rate.

Total Overhead Cost Predetermined Overhead Rate = Total Number of Patients $4, 122,500 + $22,005,000 2,500 + 22,500 = $1,045.1 per patient

b. Computation of total cost assigned to Patient A and Patient B

Particular	Patient A($)	Patient B($)
Direct Material	5,000	6,700
Direct Labor	26,250	37,000
Variable Overhead Cost:
ICU	-	2,002 (7 X 286)
Other	1,638 (14 X 117)	1,404 (12 X 117)
Fixed Cost	14,631 (14 X 1045.1)	19,856 (19 X 1045.1)
Total Cost	47,519	66,962

2. Assuming McCullough uses two overhead rates

a. Computation of overhead rates

Overhead Cost Overhead Rate of ICU = Number of Patients $4, 122,500 2,500 = $1,649 per patient Overhead Cost Overhead Rate of Other = Number of Patients $22,005,000 22,500 = $978 per patient

b. Computation of total cost

Particular	Patient A($)	Patient B($)
Direct Material	5,000	6,700
Direct Labor	26,250	37,000
Variable Overhead Cost:
ICU	-	2,002 (7 X 286)
Other	1,638 (14 X 117)	1,404 (12 X 117)
Fixed Cost:
ICU	-	11,543 (7 X 1,649)
Other	13,692 (14 X 978)	11,736 (12 X 978)
Total Cost	46,580	70,385