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 2. $3,200.se $ 236 Other 18.000 $14,000,000 $ Total 20.ee $17.200.000 Direct materials Direct labor Total number of patient.days (including ICU) Number of patient-days spent in ICU Patient $ 4. Se 525, 14 Patient B $ 0.20 $36,00 21 2 Required: 1. Assuming McCullough calculates two overhead rates os recommended by the staff accountant, calculate: 3. The ICU and Other overhead rates. < Prev 7 of 8 III Next > e here to search o a

Answer 1

1a) Predetermine ICU overhead rate = (3200000/2000+236) = 1836 per patient days

Predetermine other overhead rate = (14000000/18000+96) = 873.78 per patient days

1b) Total cost of patient A = 4500+25000+14*873.78 = 41733

Total Cost of patient B = 6200+36000+(7*1836+14*873.78) = 67285

2a) Plantwide overhead rate = (2000*236+18000*96+17200000)/20000 = 970

2b) Total Cost of patient A = 4500+25000+970*14 = 43080

Total Cost of patient B = 6200+36000+21*970 = 62570