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 2,300 $ 4,158, 400 $ 301 Estimated number of patient-days Estimated fixed overhead cost Estimated variable overhead cost per patient- day Other 4,600 $4,830,000 $ 120 Total 6,900 $8,988,400 Patient A Patient B Direct materials $ 4,800 $ 6,500 Direct labor $25,750 $36,600 Total number of patient-days (including 12 17 ICU) Number of patient-days spent in ICU 0 5

Answer 1

Requirement 1a:

Departmental overhead rate = Total departmental overhead cost / Total Departmental base quantity

Predetermined ICU Overhead rate

Total Overhead cost = (2,300 * $301) + $4,158,400 = $4,850,700

Total Number of patient days in ICU = 2,300

ICU Overhead rate = $4,850,700 / 2,300 patient days = $2,109.00 per patient days

Predetermined Other Overhead rate

Total Overhead cost = (4,600 * $120) + $4,830,000 = $5,382,000

Total Number of patient days in Other = 4,600

Other Overhead rate = $5,382,000 / 4,600 patient days = $1,170.00 per patient days

Requirement 1b:

Overhead cost

Patient A = (0 * $2,109) + (12 * $1,170) = $14,040

Patient B = (5 * $2,109) + (12 * $1,170) = $24,585

Total Cost

Particulars	Patient A	Patient B
Direct Materials	$4,800	$6,500
Direct Labor	$25,750	$36,600
Overhead cost	$14,040	$24,585
Total Cost	$44,590	$67,685

Requirement 2a:

Predetermined overhead rate = Total Overhead cost / Total Base Quantity

Total Overhead cost

Variable overhead cost = (2,300 patient days * $301) + (4,600 patient days * $120) = $1,244,300

Fixed overhead cost = $8,988,400

Total Overhead cost = $1,244,300 + $8,988,400 = $10,232,700

Predetermined overhead rate = $10,232,700 / 6,900 patient days = $1,483.00 per patient day

Requirement 2b:

Total Cost

Particulars	Patient A	Patient B
Direct Materials	$4,800	$6,500
Direct Labor	$25,750	$36,600
Overhead cost (12 * $1,483.00) (17 * $1,483.00)	$17,796	$25,211
Total Cost	$48,346	$68,311

All the best...