A contractor's annual payroll is $2,400,000 with total overhead costs of $480,000. What is the overhead rate as a percentage of payroll?
Correct Answer
A) 20%
Overhead rate = Total overhead costs ÷ Total payroll × 100 = $480,000 ÷ $2,400,000 × 100 = 20%.
Why This Is the Correct Answer
The overhead rate is calculated by dividing total overhead costs by total payroll and multiplying by 100 to get a percentage. Using the formula: $480,000 ÷ $2,400,000 × 100 = 0.20 × 100 = 20%. This represents how much overhead expense the contractor incurs for every dollar of payroll, which is a standard business metric for measuring operational efficiency.
Why the Other Options Are Wrong
Option B: 15%
15% would result from an incorrect calculation, possibly dividing $360,000 by $2,400,000 instead of using the actual overhead figure of $480,000.
Option C: 30%
30% would result from dividing $720,000 by $2,400,000, which uses an overhead amount that's $240,000 higher than the actual $480,000 given.
Memory Technique
Remember 'TOP' - Total Overhead over Payroll. The overhead sits on 'top' of payroll costs, so overhead goes in the numerator (top) of the fraction.
Reference Hint
Look up business management or cost accounting sections in your contractor reference manual, specifically chapters covering overhead calculations and job costing.
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