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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:  ICUOtherTotalEstimated number of patient-days 2,500  22,500  25,000 Estimated fixed overhead cost$4,122,500 $22,005,000 $26,127,500 Estimated variable overhead cost per patient-day$286 $117       Patient APatient BDirect materials$5,000 $6,700 Direct labor$26,250 $37,000 Total number of patient-days (including ICU) 14  19 Number of patient-days spent in ICU 0  7   Required:1. 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.(Round "Predetermined overhead rate" to 2 decimal places. Round other intermediate calculations and final answers to the nearest whole dollar amount.)

Question

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   2,500     22,500     25,000  
Estimated fixed overhead cost $ 4,122,500   $ 22,005,000   $ 26,127,500  
Estimated variable overhead cost per patient-day $ 286   $ 117        
 

 

  Patient A Patient B
Direct materials $ 5,000   $ 6,700  
Direct labor $ 26,250   $ 37,000  
Total number of patient-days (including ICU)   14     19  
Number of patient-days spent in ICU   0     7  
 

 

Required:

1. 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.

(Round "Predetermined overhead rate" to 2 decimal places. Round other intermediate calculations and final answers to the nearest whole dollar amount.)

check_circleAnswer
Step 1
la)
Estimated overhead:
Fixed overhead
Variable overhead
S26,127,500
[2500 x 286]+[22500 x 117]
$3,347,500
X
$29,475,000
Total estimated overhead
Estimated patient days
|Predetermined overhead rate
25,000
$29,475,000 /25,000
$1,179
lb)
Patient A
Patient B
$5,000
$26,250
$16,506 [1179x 19] =
$6,700
$37,000
Direct material
Direct labor
Overhead
[1179 x 14]
$22,401
$47,756
Total cost
help_outline

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la) Estimated overhead: Fixed overhead Variable overhead S26,127,500 [2500 x 286]+[22500 x 117] $3,347,500 X $29,475,000 Total estimated overhead Estimated patient days |Predetermined overhead rate 25,000 $29,475,000 /25,000 $1,179 lb) Patient A Patient B $5,000 $26,250 $16,506 [1179x 19] = $6,700 $37,000 Direct material Direct labor Overhead [1179 x 14] $22,401 $47,756 Total cost

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