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 Other Total

Estimated number of patient-days 3,700 22,200 25,900

Estimated fixed overhead cost $ 6,119,800 $ 23,110,200 $ 29,230,000

Estimated variable overhead cost per patient-day $ 305 $ 99

Patient A Patient B

Direct materials $ 6,200 $ 7,900

Direct labor $ 29,250 $ 39,400

Total number of patient-days (including ICU) 26 31

Number of patient-days spent in ICU 0 19

Required: 1. Assuming McCullough uses 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.

2. 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.

Answer 1

1a) ICU overhead rate = (6119800/3700+305) = 1959 per hour

Other overhead rate = (23110200/22200+99) = 1140 per hour

1b) Calculate total Cost

	Patient A	Patient B
Direct material	6200	7900
Direct labor	29250	39400
ICU overhead	0	19*1959 = 37221
Other Overhead	26*1140 = 29640	12*1140 = 13680
Total cost	65090	98201

1a) Predetermine overhead rate = (3700*305+22200*99+29230000)/25900 = 1257

1b) Calculate total Cost

	Patient A	Patient B
Direct material	6200	7900
Direct labor	29250	39400
Overhead	26*1257 = 32682	31*1257 = 38967
Total cost	68132	86267