Chapter 2, Problem 20P

Plantwide versus Multiple Predetermined Overhead Rates: Service Industry 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 ofmedical equipment, insurance, utilities, incidental medical supplies, and the labor costs associated with around-the-clock monitoring ofpatients 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 spendsin 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 costsallocated to patients. The first overhead rate would include all overhead costs within the Intensive Care Unit (ICU) and the second overheadrate would include all other overhead costs. Information pertaining to the hospital’s estimated number of patient-days, its estimated overheadcosts, and two of its patients—Patient A and Patient B—is provided below:

Required:
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.
3. What insights are revealed by the staff accountant’s approach?