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 hospitals 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 2,100 $3,347, 400 $ 257 Other 10,500 $8,704,500 $ 122 Total 12,600 $12,051,900 Direct materials Direct labor Total number of patient-days (including ICU) Number of patient-days spent in ICU Patient A $ 4,600 $ 25,250 10 0 Patient B $ 6,300 $ 36,200 15 3 Required: 1. 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. 2. Assuming McCullough continues to use 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. (Round "Predetermined overhead rate" to 2 decimal places. Round other intermediate calculations and final answers to the nearest dollar amount.) per patient-day per patient-day 1a. Predetermined ICU overhead rate Predetermined Other overhead rate 16. Total cost for patient A Total cost for patient B 2a. Predetermined overhead rate 2b. Total cost for patient A Total cost for patient B per patient-day

Answer 1

1. If the hospital uses two overheads rates i.e., ICU and other overhead then the overhead rate will be
a) ICU overhead rate = Total ICU overhead cost / No of patients days
ICU Overhead rate = $3887100/ 2100 = $ 1851 per patient days
Other overhead rate = Total Other overhead cost / No of patients days
Other Overhead rate = $9985500/ 10500 = $ 951 per patient days

b) Total cost of patient A and B

Patient A Patient B Direct Material 4600 6300 Direct Labour 25250 36200 Fixed Overhead (0:3) ICU 0 337400 (10:12) Other 3956591 4747909 Variablr Overhead ICU 0 771 Other 1220 1464 Total cost 3987661 5130044

2. a) The pre determined overhead rate would be $ 1335.50 per patient day.

b) Total cost of patient A and B will be

Patient A Patient B Direct Material 4600 6300 Direct Labour 25250 36200 Fixed Overhead (10:15) 4820760 7231140 Variablr Overhead [(257+122)* Patient days) 3790 5685 Total cost 4854400 7279325