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: 15.0%
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: 13.3%
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.
Option D: 30.0%
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.
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
More Business & Finance Questions
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?
When establishing professional relationships with architects and engineers, what is the most important factor for a general contractor to consider?
A partnership agreement for a construction company should address all of the following EXCEPT:
A contractor purchases a truck for $60,000. After 5 years, it has accumulated depreciation of $35,000. What is the truck's book value?
A contractor's business plan projects first-year revenue of $500,000 with a 15% net profit margin. If actual revenue is $450,000 with the same profit margin, what is the variance in net profit?
Using the Modified Accelerated Cost Recovery System (MACRS), construction equipment is typically depreciated over how many years?
A contractor is comparing financing options for equipment purchase. Option A: $80,000 cash purchase. Option B: $20,000 down, $65,000 financed at 6% for 4 years. What is the total cost of Option B?
A contractor purchases equipment using a capital lease with a present value of $120,000. How should this be recorded on the balance sheet?
People Also Study
Related Study Resources
Previous Question
A safety incident occurs on a jobsite resulting in a worker requiring medical treatment beyond first aid. Within how many hours must this be reported to OSHA?
Next Question
A material supplier offers terms of 2/10 net 30. If an invoice is $15,000, what is the effective annual interest rate of not taking the discount?