McCullough Hospital uses a job-order costing system to assign costs to its patie
ID: 2589161 • 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
ar amount.)
ICU Other Total Estimated number of patient-days 2,200 8,800 11,000 Estimated fixed overhead cost $ 3,979,800 $ 6,767,200 $ 10,747,000 Estimated variable overhead cost per patient-day $ 241 $ 116Explanation / Answer
Predetermined Overhead Rate ICU Other Total Estimated number of patient-days 2200 8800 Estimated Variable overhead cost per patient-day 241 116 530200 1020800 1551000 Estimated fixed overhead cost 3979800 6767200 10747000 Total Overhead cost 4510000 7788000 12298000 No. Of Patient-days 2200 8800 11000 Overhead rate 2050 885 1118 Total cost of both Patients Patient A Patient B Direct materials 4700 6400 Direct labor 25500 36400 Overhead: ICU & other 12298 17888 Total cost 42498 60688 Pat A: $1118 x 11 = $12298 Pat B: $1118 x 16 = $17888 Total cost of both Patients Patient A Patient B Direct materials 4700 6400 Direct labor 25500 36400 Overhead: ICU allocated cost 8200 Other allocated cost 9735 10620 Total cost 39935 61620 ICU Cost: $2050 x 4 = $8200 Other Cost: $885 x 11 = $9735 $885 x 12 = $10620 1a. Predetermined Overhead rate $1,118 Per Patient-day 1b. Total cost for Patient A $42,498 Total cost for Patient B $60,688 2a. Predetermined ICU overhead rate $2,050 Per Patient-day Predetermined Other Overhead rate $885 Per Patient-day 2b. Total cost for Patient A $39,935 Total cost for Patient B $61,620