A contractor's annual overhead expenses total $240,000, and they expect to generate $1,200,000 in direct costs for the year. What is the overhead rate as a percentage of direct costs?
Correct Answer
A) 20%
Overhead rate = Total Overhead ÷ Total Direct Costs = $240,000 ÷ $1,200,000 = 0.20 or 20%. This percentage is used to allocate overhead costs to individual projects based on their direct costs.
Why This Is the Correct Answer
The overhead rate is calculated by dividing total overhead expenses by total direct costs, then converting to a percentage. Using the formula: $240,000 ÷ $1,200,000 = 0.20 = 20%. This rate represents how much overhead cost is incurred for every dollar of direct costs. The 20% overhead rate means that for every $1.00 in direct costs, the contractor incurs $0.20 in overhead expenses.
Why the Other Options Are Wrong
Option B: 15%
30% would result from a significant calculation error, possibly from incorrectly setting up the formula or major arithmetic mistakes.
Option C: 25%
25% would result from an incorrect calculation, possibly from rounding errors or misplacing decimal points during the division process.
Option D: 30%
15% would result from an incorrect calculation. If you got 15%, you may have reversed the calculation or made an arithmetic error in the division.
Memory Technique
Remember 'OH over DC' - Overhead over Direct Costs. Think of overhead as the 'extra burden' that rides on top of direct costs, so you divide overhead BY direct costs to find the rate.
Reference Hint
Look up 'Overhead Allocation' or 'Cost Accounting' in construction management references, typically found in business practices or project management chapters.
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