A company has quarterly overhead costs of $180,000 and completes projects totaling $2,400,000 in revenue during that quarter. What is the overhead rate as a percentage of revenue?
Correct Answer
A) 7.5%
Overhead rate = $180,000 ÷ $2,400,000 = 0.075 = 7.5%. This represents the percentage of revenue needed to cover overhead costs during the quarter.
Why This Is the Correct Answer
The overhead rate is calculated by dividing total overhead costs by total revenue, then converting to a percentage. Using the formula: $180,000 ÷ $2,400,000 = 0.075, which equals 7.5% when converted to percentage form. This represents the portion of each revenue dollar that must be allocated to cover overhead expenses.
Why the Other Options Are Wrong
Option B: 13.3%
This would result from incorrectly dividing revenue by overhead costs ($2,400,000 ÷ $180,000 = 13.33), which reverses the proper formula and gives a meaningless result for overhead rate calculation.
Option C: 15.0%
This percentage would require overhead costs of $360,000 ($2,400,000 × 0.15), which is double the actual overhead amount given in the problem.
Option D: 30.0%
This percentage would require overhead costs of $720,000 ($2,400,000 × 0.30), which is four times the actual overhead amount and represents an unrealistically high overhead rate.
Memory Technique
Remember 'Over Revenue' - Overhead goes OVER Revenue in the fraction (overhead/revenue), just like overhead costs go over your head in the office ceiling.
Reference Hint
Business and Finance for Contractors chapter on overhead calculations and cost accounting principles
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