Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 41

Two-Stage Allocation and Product Costing

Owl-Eye Radiologists (OR) does various types of diagnostic imaging. Radiologists perform tests using sophisticated equipment. OR’s management wants to compute the costs of performing tests for two different types of patients: those who are hospitalized (including those in emergency rooms) and those who are not hospitalized but are referred by physicians. The data for June for the two categories of patients follow.

	Hospital Patients	Other Patients	Total
Units (i.e., procedures) produced	640	860	1,500
Equipment-hours used	240	120	360
Direct labor-hours	480	180	660
Direct labor costs	$38,400	$10,800	$49,200
Overhead costs			$49,560

The accountant first assigns overhead costs to two pools: overhead related to equipment-hours and overhead related to labor-hours. The analysis of overhead accounts by the cost accountant follows:

Account	Amount	Related to:
Utilities	$ 4,800	Equipment-hours
Supplies	12,600	Labor-hours
Indirect labor and supervision	20,400	Labor-hours
Equipment depreciation and maintenance	8,400	Equipment-hours
Miscellaneous	3,360	Equipment-hours

Required

a. Compute the predetermined overhead rates assuming that Owl-Eye Radiologists uses equipment-hours to allocate equipment-related overhead costs and labor-hours to allocate labor-related overhead costs.

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b. Compute the total costs of production and the cost per unit for each of the two types of patients undergoing tests in June.

Step 1 of 5

a.

Compute the predetermined overhead rates assuming equipment hours to allocate equipment related overhead costs and labor hours to allocate labor related overhead costs:

Cost of equipment related overhead assigned to products based on equipment hours. First of all, allocation base equipment hours should be considered. Thereafter, overhead must divide by allocation base of equipment hours. The relevant computation to determine predetermined overhead is as follows.