A contractor's monthly overhead costs include: office rent $3,000, utilities $500, insurance $2,000, office salaries $8,000, and equipment depreciation $1,500. If direct labor for the month is $45,000, what is the overhead rate as a percentage of direct labor?
Correct Answer
B) 33.3%
Total monthly overhead = $3,000 + $500 + $2,000 + $8,000 + $1,500 = $15,000. Overhead rate = $15,000 ÷ $45,000 = 0.333 or 33.3%.
Why This Is the Correct Answer
The overhead rate is calculated by dividing total overhead costs by direct labor costs. First, we sum all overhead expenses: $3,000 + $500 + $2,000 + $8,000 + $1,500 = $15,000. Then we divide this by direct labor ($45,000) to get $15,000 ÷ $45,000 = 0.333 or 33.3%. This percentage represents how much overhead cost is incurred for every dollar of direct labor.
Why the Other Options Are Wrong
Option A: 28.9%
28.9% would result from an incorrect calculation, possibly from missing one of the overhead components or making an arithmetic error in the addition or division
Option C: 35.6%
35.6% suggests an error in either the overhead total calculation or the division step, possibly from including costs that shouldn't be in overhead or miscalculating the sum
Option D: 38.2%
38.2% indicates a significant calculation error, likely from either substantially miscalculating the overhead total or using an incorrect divisor
Memory Technique
Remember 'ROUIS' for overhead components: Rent, Office salaries, Utilities, Insurance, equipment depreciation (Something that depreciates)
Reference Hint
Look up 'Overhead Calculations' or 'Job Costing' in your construction business management or estimating reference materials
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