Question

Problem 3-20 (Algo) Plantwide versus Multiple Predetermined Overhead Rates: Service Industry (L03-1, LO3-2, LO3-3, LO3-4] 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: Estimated number of patient-days Estimated fixed overhead cost Estimated variable overhead cost per patient-day ICU 4,000 $6,556,000 $ 278 Other 8,000 $8,136,000 $ 114 Total 12,000 $14,692,000 Direct materials Direct labor Total number of patient-days (including ICU) Number of patient-days spent in ICU Patient A Patient B $ 6,500 $ 8, 200 $ 30,000 $ 40,000 29 22

Answer 1

1a.
	ICU	Other	Total
Estimated number of patient days	4000	8000	12000
(*) Estimated variable overhead cost per patient day	278	114
Estimated total variable overhead cost	1112000	912000	2024000
(+) Estimated fixed overhead cost	6556000	8136000	14692000
Estimated total overhead cost	7668000	9048000	16716000

Predetermined overhead rate = Estimated total overhead cost / Estimated total number of patient days = 16716000 / 12000

1393

per patient day

1b.
	Patient A	Patient B
Direct materials	6500	8200
Direct labor	30000	40000
Overhead cost applied ( Total number of patient days * Predetermined overhead rate )	40397	47362
Total cost	76897	95562

Total cost for patient A	76897
Total cost for patient B	95562

2a.
	ICU	Other
Estimated fixed overhead cost	6556000	8136000
(/) Estimated number of patient days	4000	8000
	1639	1017
(+) Estimated variable overhead cost per patient day	278	114
Predetermined overhead rate	1917	1131

Predetermined ICU overhead rate	1917	per patient day
Predetermined Other overhead rate	1131	per patient day

2b.
	Patient A	Patient B
Total number of patient days	29	34
(-) Number of patient days spent in ICU	0	22
Other Patient days	29	12

	Patient A		Patient B
Direct materials		6500		8200
Direct labor		30000		40000
Overhead allocation :
ICU ( Predetermined ICU overhead rate * Number of patient days in ICU )	0		42174
Other ( Predetermined other overhead rate * Other patient days )	32799		13572
Total overhead applied		32799		55746
Total cost		69299		103946

Total cost for patient A	69299
Total cost for patient B	103946