Great Heart Clinic is a medical service institute that provides various services for its patients. The doctors working for the institute are required to fill out a note in the medical system for each patient treated. The system then generates a unique bill for each patient according to the pricing for the specific service or treatment received. Included in each patient’s bill is the applied overhead cost based on direct labor hours. The clinic created the following overhead budget for this year, but the actual overhead was $296,047. Budget Direct labor hours 10,000 Overhead costs: Indirect material $3,500 Indirect labor $45,000 Utilities $6,000 Insurance $78,000 Property taxes $30,000 Total $162,500 During this year, the doctors actually charged a total of 12,190 hours as shown below. Doctors Hours Charged Doctor A 2,000 Doctor B 1,850 Doctor C 1,960 Doctor D 2,100 Doctor E 2,500 Doctor F 1,780 Total 12,190 The overhead variance is deemed material by the CEO, and he wonders why this variance happened and how to address this variance. The CEO is also considering implementing an activity-based costing (ABC) system. Question 1: Explain whether the clinic should use a job costing system or a process costing system. Question 2: Calculate the applied overhead and identify if it is over or under applied. Show your calculations. Question 3: Identify and explain two shortcomings of using predetermined overhead rates to apply overhead. Question 4: Identify and explain why there is usually a difference between the applied overhead and the actual overhead. Question 5: Identify and explain the appropriate accounting treatment of this under or over applied overhead amount.
Great Heart Clinic is a medical service institute that provides various services for its patients. The doctors working for the institute are required to fill out a note in the medical system for each patient treated. The system then generates a unique bill for each patient according to the pricing for the specific service or treatment received. Included in each patient’s bill is the applied
| Budget | |
|---|---|
| Direct labor hours | 10,000 |
| Overhead costs: | |
| Indirect material | $3,500 |
| Indirect labor | $45,000 |
| Utilities | $6,000 |
| Insurance | $78,000 |
| Property taxes | $30,000 |
| Total | $162,500 |
During this year, the doctors actually charged a total of 12,190 hours as shown below.
Doctors Hours Charged
| Doctor A | 2,000 |
|---|---|
| Doctor B | 1,850 |
| Doctor C | 1,960 |
| Doctor D | 2,100 |
| Doctor E | 2,500 |
| Doctor F | 1,780 |
| Total | 12,190 |
The overhead variance is deemed material by the CEO, and he wonders why this variance happened and how to address this variance. The CEO is also considering implementing an activity-based costing (ABC) system.
Question 1: Explain whether the clinic should use a
Question 2: Calculate the applied overhead and identify if it is over or under applied. Show your calculations.
Question 3: Identify and explain two shortcomings of using predetermined overhead rates to apply overhead.
Question 4: Identify and explain why there is usually a difference between the applied overhead and the actual overhead.
Question 5: Identify and explain the appropriate accounting treatment of this under or over applied overhead amount.
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