McCullough Hospital uses a job-order costing system to assign costs to its patie
ID: 2589028 • Letter: M
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:
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.
(Round "Predetermined overhead rate" to 2 decimal places. Round your intermediate calculations and final answers to the nearest dollar amount.)
ICU Other Total Estimated number of patient-days 2,700 5,400 8,100 Estimated fixed overhead cost $ 4,444,200 $ 5,340,600 $ 9,784,800 Estimated variable overhead cost per patient-day $ 295 $ 103Explanation / Answer
1a)Estimated variable overhead :[2700*295]+[103*5400]=1352700
Total overhead :9784800+1352700=11137500
Predetermined overhead rate :estimated overhead /estimated patient days
=11137500/8100
= $ 1375 per patient days
1b)
2a)Predetermined ICU overhead rate =variable rate+fixed overhead rate
= 295+[4444200/2700]
= 295+1646
= 1941 per patient day
Predetermined Other overhead rate = 103+[5340600/5400]
= 103+989
= 1092 per patient days
2b)
Patient A B Direct material 5200 6900 direct labor 26750 37400 overhead assigned 22000 [16*1375] 28875 [21*1375] Total cost 53950 73175