A general contractor is calculating overhead costs for a project bid. The company's annual overhead expenses are $480,000 and they expect to generate $2,400,000 in direct costs for the year. What overhead percentage should be applied to this project's direct costs?
Correct Answer
A) 20%
Overhead percentage is calculated by dividing total overhead expenses by total direct costs: $480,000 ÷ $2,400,000 = 0.20 or 20%. This percentage is then applied to individual project direct costs to allocate overhead.
Why This Is the Correct Answer
The overhead percentage is calculated using the fundamental formula: Total Overhead Expenses ÷ Total Direct Costs. With annual overhead of $480,000 and expected direct costs of $2,400,000, the calculation yields $480,000 ÷ $2,400,000 = 0.20 or 20%. This percentage represents the proportion of overhead costs relative to direct costs and is applied consistently across all projects to ensure proper cost allocation and recovery of overhead expenses.
Why the Other Options Are Wrong
Option B: 15%
25% suggests an error in calculation, possibly from reversing numbers or using incorrect overhead or direct cost figures in the formula.
Option C: 25%
30% indicates a significant calculation error, possibly from confusing the overhead percentage with markup percentage or using wrong base numbers.
Option D: 30%
15% would result from incorrectly calculating the overhead ratio, possibly by using wrong figures or making arithmetic errors in the division.
Memory Technique
Use 'OH/DC = OH%' (Overhead divided by Direct Costs equals Overhead Percentage). Think 'Over Head, Divide Costs' to remember the formula direction.
Reference Hint
Look up 'Cost Estimating' or 'Project Cost Control' chapters in construction management references, specifically sections on overhead allocation and indirect cost calculations.
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