Leeds Architectural Consultants began operations on January 2. The following activity was recorded in the company's Work in Process account for the first month of operations:
Leeds Architectural Consultants is a service firm, so the names of the accounts it uses are different from the names used in manufacturing companies. Costs of Subcontracted Work is comparable to Direct Materials; Direct Staff Costs is the same as Direct Labor; Studio Overhead is the same as Manufacturing Overhead; and Completed Projects is the same as Finished Goods. Apart from the difference in terms, the accounting methods used by the company are identical to the methods used by manufacturing companies.
Leeds Architectural Consultants uses a job-order costing system and applies studio overhead to Work in Process on the basis of direct staff costs. At the end of January, only one job was still in process. This job (Lexington Gardens Project) had been charged with 6,500 in direct staff costs.
(a) Compute the predetermined overhead rate that was in use during January.

We can calculate the predetermined overhead rate using the direct labor costs (which is the allocation base) and the overhead allocated in January:

Applying studio overhead and direct employee costs results in a rate of $120,000/$75000, or 160%.

The amount of the overall manufacturing overhead cost that will be allocated to each unit of product created is calculated using a predefined overhead rate, sometimes referred to as a plant-wide overhead rate. The rate is calculated by dividing the projected number of direct work hours by the fixed overhead cost.

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