A California contractor is calculating overhead costs for bid preparation. According to standard cost accounting practices, which of the following should be classified as indirect overhead rather than direct job costs?
Correct Answer
D) General liability insurance premiums for the contracting business
General liability insurance premiums are indirect overhead costs that benefit the entire business operation, not just one specific project. Direct costs include materials, equipment, and labor directly attributable to a specific project. Proper classification affects accurate bid preparation and profitability analysis.
Why This Is the Correct Answer
General liability insurance premiums cover the entire business operation — all projects, all employees, all locations — and cannot be attributed to a single project. This makes them indirect overhead (also called general and administrative expense). Indirect costs are spread across all projects through an overhead rate, not charged directly to one job.
Why the Other Options Are Wrong
Option A: Project manager salary for on-site supervision
An on-site project manager's salary is a direct cost when that person is dedicated to supervising a specific project. The key word is 'on-site supervision' — labor that can be traced to a specific job is direct, even if the worker is salaried rather than hourly.
Option B: Crane rental used exclusively on the project site
Equipment rented exclusively for use on a specific project is a direct cost. The rental fee is entirely attributable to that one job. If the crane were shared across multiple projects, a portion might become indirect overhead — but exclusive-use rental is direct.
Option C: Concrete delivered specifically for the project
Concrete delivered specifically for a project is a direct material cost by definition. Materials that are physically incorporated into a specific project are always direct costs, regardless of quantity or value.
Memory Technique
Ask the question: 'Would this cost exist if THIS project didn't exist?' For direct costs, the answer is no (concrete, crane rental, on-site PM). For indirect overhead like general liability insurance, the answer is yes — the business would still pay those premiums even without any specific project. That's the indirect overhead test.
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