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		3,500			17,500			21,000
Estimated fixed overhead cost	$	5,460,000		$	16,327,500		$	21,787,500
Estimated variable overhead cost per patient-day	$	303		$	108

Direct materials	$	6,000		$	7,700
Direct labor	$	28,750		$	39,000
Total number of patient-days (including ICU)		24			29
Number of patient-days spent in ICU		0			17
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

1a.
	ICU	Other	Total
Estimated number of patient days	3500	17500	21000
(*) Estimated variable overhead cost per patient day	303	108
Estimated total variable overhead cost	1060500	1890000	2950500
(+) Estimated fixed overhead cost	5460000	16327500	21787500
Estimated total overhead cost	6520500	18217500	24738000

Predetermined overhead rate = Estimated total overhead cost / Estimated total number of patient days = 24738000 / 21000

1178

per patient day

1b.
	Patient A	Patient B
Direct materials	6000	7700
Direct labor	28750	39000
Overhead cost applied ( Total number of patient days * Predetermined overhead rate )	28272	34162
Total cost	63022	80862

Total cost for patient A	63022
Total cost for patient B	80862

2a.
	ICU	Other
Estimated fixed overhead cost	5460000	16327500
(/) Estimated number of patient days	3500	17500
	1560	933
(+) Estimated variable overhead cost per patient day	303	108
Predetermined overhead rate	1863	1041

Predetermined ICU overhead rate	1863	per patient day
Predetermined Other overhead rate	1041	per patient day

2b.
	Patient A	Patient B
Total number of patient days	24	29
(-) Number of patient days spent in ICU	0	17
Other Patient days	24	12

	Patient A		Patient B
Direct materials		6000		7700
Direct labor		28750		39000
Overhead allocation :
ICU ( Predetermined ICU overhead rate * Number of patient days in ICU )	0		31671
Other ( Predetermined other overhead rate * Other patient days )	24984		12492
Total overhead applied		24984		44163
Total cost		59734		90863

Total cost for patient A	59734
Total cost for patient B	90863