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 2,700 $4,444,200 $ 295 Other 5,400 $5,340,600 $ 103 Total 8,100 $9,784,800 $ Direct materials Direct labor Total number of patient-days (including ICU) Number of patient-days spent in ICU Patient A Patient B $ 5,200 6,900 $ 26,750 $ 37,400 16 21 0 9 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.)

Answer 1

1a.
	ICU	Other	Total
Estimated number of patient days	2700	5400	8100
(*) Estimated variable overhead cost per patient day	295	103
Estimated total variable overhead cost	796500	556200	1352700
(+) Estimated fixed overhead cost	4444200	5340600	9784800
Estimated total overhead cost	5240700	5896800	11137500

Predetermined overhead rate = Estimated total overhead cost / Estimated total number of patient days = 11137500 / 8100

1375

per patient day

1b.
	Patient A	Patient B
Direct materials	5200	6900
Direct labor	26750	37400
Overhead cost applied ( Total number of patient days * Predetermined overhead rate )	22000	28875
Total cost	53950	73175

Total cost for patient A	53950
Total cost for patient B	73175

2a.
	ICU	Other
Estimated fixed overhead cost	4444200	5340600
(/) Estimated number of patient days	2700	5400
	1646	989
(+) Estimated variable overhead cost per patient day	295	103
Predetermined overhead rate	1941	1092

Predetermined ICU overhead rate	1941	per patient day
Predetermined Other overhead rate	1092	per patient day

2b.
	Patient A	Patient B
Total number of patient days	16	21
(-) Number of patient days spent in ICU	0	9
Other Patient days	16	12

	Patient A	Patient B
Direct materials		5200		6900
Direct labor		26750		37400
Overhead allocation :
ICU ( Predetermined ICU overhead rate * Number of patient days in ICU )	0		17469
Other ( Predetermined other overhead rate * Other patient days )	17472		13104
Total overhead applied		17472		30573
Total cost		49422		74873

Total cost for patient A	49422
Total cost for patient B	74873