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 C: 38.2%
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: 35.6%
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
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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