Problem 2-20 Plantwide versus Multiple Predetermined Overhead Rates: Service Ind
ID: 2332477 • Letter: P
Question
Problem 2-20 Plantwide versus Multiple Predetermined Overhead Rates: Service Industry [LO2-1, LO2-2, LO2-3, LO2-4]
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:
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.)
ICU Other Total Estimated number of patient-days 3,500 17,500 21,000 Estimated fixed overhead cost $ 5,460,000 $ 16,327,500 $ 21,787,500 Estimated variable overhead cost per patient-day $ 303 $ 108Explanation / Answer
1.
A. Pre determined overhead rate = Total Cost/ total patients per day
= $24738000/21000 patients per day
= $1178 patients per day is predetermined overhead rate.
Total cost = total fixed cost+ total variable cost
Total cost= $21787500+{(3500patients per day*$303)+(17500 patients per day*$108)}
Total cost= $24738000.
B.
Patient A Patient B
$ $
Direct material 6000 . 7700
Direct labour 28750 39000
Overhead cost 28272 . 34162
Total cost 63022 80862
2.
a. Pre determined overhead rate= total cost/ patients per day
ICU DEPT.= 6520500/3500 patients per day
Predetermined overhead rate for ICU DEPT= $1863
Other department= 18217500/17500
Predetermined overhead rate of other department= $1041
B.
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