How is the Overhead Rate calculated?

• A. Total overhead divided by total direct salary
• B. Total direct salary divided by total overhead
• C. Total overhead plus Total direct salary
• D. Total indirect salary plus All other overhead expenses

Answer: (A)

The overhead rate shows how much indirect cost is allocated for each dollar of direct labor. It’s calculated by dividing total overhead costs by total direct salary (overhead ÷ direct labor). This base ties overhead to the level of labor resources used, letting you apply overhead proportionally to projects. The inverse (direct salary divided by overhead) isn’t a standard rate, and mixing costs or adding them (like total overhead plus direct salary) doesn’t produce a rate at all.