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 patientdays (each night that a patient spends in the hospital counts as one patient-day) to allocate overhead costs to patients. For the most recent period, this predetermined rate was based on three estimates—fixed overhead costs of $17,440,000, variable overhead costs of $110 per patient-day, and a denominator volume of 20,000 patient-days. 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 these two cost pools and two of the hospital’s 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 $ 3,224,000 $ 14,216,000 $ 17,440,000 Estimated variable overhead cost per patient-day $ 236 $ 96 Patient A Patient B Direct materials $ 5,100 $ 6,800 Direct labor $ 26,500 $ 37,200 Total number of patient-days (including ICU) 14 21 Number of patient-days spent in ICU 0 7 Required (see below for hints, if needed): 1.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. 2. 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. (Round "Predetermined overhead rate" to 2 decimal places. Round other intermediate calculations and final answers to the nearest dollar amount.) Predetermined overhead rate per patient-day Total cost for patient A Total cost for patient B Predetermined ICU overhead rate per patient-day Predetermined Other overhead rate per patient-day Total cost for patient A Total cost for patient B Hints: Part 1a: In the numerator of your POHR, make sure to include each department's fixed overhead and each department's variable overhead (you will have to calculate each department's total variable overhead). (See the video solution for Example 2-3, part a to walk through this type of calculation.) Part 2a: Make sure to include each department's variable and fixed overhead in your calculation. (See the video solution for Example 2-3, part d to walk through this type of calculation.) Part 2b: Make sure to keep in mind that the table lists 'total patient days (including ICU days)' and 'ICU' days for each patient. So you need to subtract the ICU days from the total days to get each patient's non-ICU days when assigning overhead for 'other' activities.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
McCullough Hospital uses a
Historically, McCullough has used one predetermined overhead rate based on the number of patientdays (each night that a patient spends in the hospital counts as one patient-day) to allocate overhead costs to patients. For the most recent period, this predetermined rate was based on three estimates—fixed overhead costs of $17,440,000, variable overhead costs of $110 per patient-day, and a denominator volume of 20,000 patient-days.
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 these two cost pools and two of the hospital’s 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 | $ 3,224,000 | $ 14,216,000 | $ 17,440,000 |
| Estimated variable overhead cost per patient-day | $ 236 | $ 96 |
| Patient A | Patient B | |
|---|---|---|
| Direct materials | $ 5,100 | $ 6,800 |
| Direct labor | $ 26,500 | $ 37,200 |
| Total number of patient-days (including ICU) | 14 | 21 |
| Number of patient-days spent in ICU | 0 | 7 |
Required (see below for hints, if needed):
1.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.
2. 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.
(Round "Predetermined overhead rate" to 2 decimal places. Round other intermediate calculations and final answers to the nearest dollar amount.)
| Predetermined overhead rate | per patient-day | |
| Total cost for patient A | ||
|
Total cost for patient B |
||
| Predetermined ICU overhead rate | per patient-day | |
| Predetermined Other overhead rate | per patient-day | |
| Total cost for patient A | ||
| Total cost for patient B |
Hints:
Part 1a: In the numerator of your POHR, make sure to include each department's fixed overhead and each department's variable overhead (you will have to calculate each department's total variable overhead). (See the video solution for Example 2-3, part a to walk through this type of calculation.)
Part 2a: Make sure to include each department's variable and fixed overhead in your calculation. (See the video solution for Example 2-3, part d to walk through this type of calculation.)
Part 2b: Make sure to keep in mind that the table lists 'total patient days (including ICU days)' and 'ICU' days for each patient. So you need to subtract the ICU days from the total days to get each patient's non-ICU days when assigning overhead for 'other' activities.
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