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 4,000 $6,556,000 $ 278 Other 8,000 $8,136,000 $ 114 Total 12,000 $14,692,899 Direct materials Direct labor Total number of patient-days (including ICU) Number of patient-days spent in ICU Patient A Patient B $ 6,500 $ 8,200 $ 30,000 $ 40,000 29 34 @ 22 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:

Answer 1

1a.
Predetermined ICU Overhead rate = $278+6556000/4000 = $1917
Predetermined Other Overhead rate = $114+8136000/8000 = $1131

1b.
Total Cost for Patient A = $6500 + 30000 + 29 x 1131 = $69299
Total Cost for Patient B = $8200 + 40000 + 22 x 1917 + 12 x 1131 = $103946

2a.
Predetermined Overhead rate = ($6556000+8136000+4000x278+8000x114) / 12000 = $1393

2b.
Total Cost for Patient A = $6500 + 30000 + 29 x 1393 = $76897
Total Cost for Patient B = $8200 + 40000 + 34 x 1393 = $95562

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