PROBLEM 2-19. Service Company Use of Predetermined Overhead Rate [LO 6, 7, 9] So

Question

PROBLEM 2-19. Service Company Use of Predetermined Overhead Rate [LO 6, 7, 9]
Southwest Community Hospital uses a job-order costing system to track charges for each patient.
The following charges relate to Candice O’Dea, who had laparoscopic knee surgery:
Pharmacy $ 250
Sterile supply 1,000
Supplies, other 4,000
Operating room service (nursing staff) 4,000
Anesthesia 1,000
Anesthesiologist 3,000
Southwest charges patients for the use of the operating room based on a predetermined overhead
rate. The estimated overhead costs of the operating room are $5,000,000, and the activity base is available hours of 2,000.

a. Calculate the predetermined overhead rate for the operating room, and determine the charge to Candice. Assume that her surgery took 3 hours in the operating room.
b. Calculate the total cost for the knee surgery.

Explanation / Answer

a) The predetermined overhead rate is calculated as: Predetermined overhead rate = Estimated Overhead costs / Estimated Direct labor-hours Predetermined overhead rate = $5,000,000 / 2,000 = $2,500 This $2,500 is added to each unit to cover your overhead. b) The total cost for the Knee surgery is calculated as: Th total cost is determined as a sum of Direct materials and Direct labor. The total cost is the sum of all the charges related to the Knee surgery. Total cost = $13,250 When overhead is added to it, the total cost comes to $15,750

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