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 began operations on January 2. The following activity was recorded in the company’s Work in Process account for the first month of operations:

 
 

Work in Process

Costs of subcontracted work	90,000		To completed projects	501,400
Direct staff costs	198,000
Studio overhead	257,400

  

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 $13,600 in direct staff costs.

  

Required:
1.	Compute the predetermined overhead rate that was in use during January.

Explanation:

1.

Because $257,400 of studio overhead cost was applied to Work in Process on the basis of $198,000 of direct staff costs, the apparent predetermined overhead rate was 130%:

 
 

Studio overhead applied	=	$257,400	= 130% rate
Direct staff costs incurred		$198,000

 
2.

The Lexington Gardens Project is the only job remaining in Work in Process at the end of the month; therefore, the entire $44,000 balance in the Work in Process account at that point must apply to it. Recognizing that the predetermined overhead rate is 130% of direct staff costs, the following computation can be made:

 
 

Total cost added to the Lexington Gardens Project		$44,000
Less: Direct staff costs	$13,600
Studio overhead cost
($13,600 × 130%)	17,680	31,280
Costs of subcontracted work		$12,720