Your company has annual overhead costs of $480,000 and expects to generate $2,400,000 in direct costs for the year. What overhead percentage should be applied to individual projects?
Correct Answer
B) 20%
Overhead percentage is calculated as: Overhead costs ÷ Direct costs = $480,000 ÷ $2,400,000 = 0.20 or 20%.
Why This Is the Correct Answer
The overhead percentage is calculated by dividing total overhead costs by total direct costs. This gives us $480,000 ÷ $2,400,000 = 0.20 or 20%. This percentage represents how much overhead should be added to each dollar of direct costs on individual projects. The 20% overhead rate ensures that all company overhead expenses are properly allocated across all projects based on their direct cost proportions.
Why the Other Options Are Wrong
Option A: 30%
30% would recover $720,000 in overhead costs ($2,400,000 × 0.30), which is $240,000 more than the actual overhead costs of $480,000, resulting in significant overcharging.
Option D: 25%
15% would only recover $360,000 in overhead costs ($2,400,000 × 0.15), leaving $120,000 in overhead costs unrecovered, which would result in a loss.
Memory Technique
Think 'OH/DC = OH%' (Overhead divided by Direct Costs equals Overhead Percentage). Also remember that overhead should be a reasonable percentage - typically 15-25% for most contractors.
Reference Hint
Look up 'Overhead Calculation' or 'Job Costing' in construction business management chapters, typically found in contractor reference manuals under financial management sections.
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