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 2,000 18,000 20,000 Estimated fixed overhead cost $ 3,200,000 $ 14,000,000 $ 17,200,000 Estimated variable overhead cost per patient-day $ 236 $ 96 Patient A Patient B Direct materials $ 4,500 $ 6,200 Direct labor $ 25,000 $ 36,000 Total number of patient-days (including ICU) 14 21 Number of patient-days spent in ICU 0 7 Required: 1. Assuming McCullough calculates two overhead rates as recommended by the staff accountant, calculate: The ICU and Other overhead rates. 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: The predetermined overhead rate. The total cost, including direct materials, direct labor and applied overhead, assigned to Patient A and Patient B.
McCullough Hospital uses a
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 | 2,000 | 18,000 | 20,000 |
| Estimated fixed overhead cost | $ 3,200,000 | $ 14,000,000 | $ 17,200,000 |
| Estimated variable overhead cost per patient-day | $ 236 | $ 96 |
| Patient A | Patient B | |
|---|---|---|
| Direct materials | $ 4,500 | $ 6,200 |
| Direct labor | $ 25,000 | $ 36,000 |
| Total number of patient-days (including ICU) | 14 | 21 |
| Number of patient-days spent in ICU | 0 | 7 |
Required:
1. Assuming McCullough calculates two overhead rates as recommended by the staff accountant, calculate:
- The ICU and Other overhead rates.
- 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:
- The predetermined overhead rate.
- The total cost, including direct materials, direct labor and applied overhead, assigned to Patient A and Patient B.
Predetermined Overhead Rate :— It is the rate used to allocate manufacturing overhead to cost object.
It is calculated by dividing total estimated overhead cost by estimated usage of cost allocation base.
Overapplied overhead :— It is calculated by multiplying predetermined overhead rate with actual usage of cost allocation base.
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