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		3,600			32,400			36,000
Estimated fixed overhead cost	$	5,954,400		$	32,756,400		$	38,710,800
Estimated variable overhead cost per patient-day	$	290		$	123

	Patient A			Patient B
Direct materials	$	6,100		$	7,800
Direct labor	$	29,000		$	39,200
Total number of patient-days (including ICU)		25			30
Number of patient-days spent in ICU		0			18

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

1. Plant wide rate:

a.

Estimated total overhead	3,87,10,800
Estimated patient days	36,000
OH rate per day	1,075.30

b.

Particulars	Patient A	Patient B
Direct materials	6,100	7,800
Direct labor	29,000	39,200
Variable overhead	3,075	6,696
Fixed overhead applied	26,883	26,883
Total cost	65,058	80,579

Variable overhead	ICU	Other	Total
Patient A
Days	0	25
Per day	290	123
Total	0	3075	3075
Patient B
Days	18	12
Per day	290	123
Total	5220	1476	6696

Applied overhead:

Particulars	Patient A	Patient B
Number of patient days	25	30
OH rate per day	1,075.30	1,075.30
OH applied	26,882.50	32,259.00

2.

a.

	ICU	Other
Estimated total overhead	59,54,400	3,27,56,400
Estimated patient days	3600	32400
Overhead rate per day	1,654	1,011

b.

Particulars	Patient A	Patient B
Direct materials	6,100	7,800
Direct labor	29,000	39,200
Variable overhead	3,075	6,696
Fixed overhead applied	18,198	12,132
Total cost	56,373	65,828

	Patient A			Patient B
	Days in	Rate per day	OH applied	Days in	Rate per day	OH applied
ICU	-	1654	-	25	1654	41,350
Other	18	1011	18,198	12	1011	12,132
Total OH applied			18,198			53,482