MHIC NASCLA Contractors Practice Exam

How is annual company overhead typically calculated?

1. By dividing total costs by number of employees

2. As a percentage of annual gross revenue

3. By aggregating monthly expenses

4. Based on project estimates from the last year

The correct answer is: As a percentage of annual gross revenue

Calculating annual company overhead as a percentage of annual gross revenue is a widely accepted method for understanding the financial health of a business. This approach allows companies to relate their overhead costs directly to their income, providing insight into how efficiently they are operating. By using a percentage of gross revenue, businesses can easily adjust their overhead calculations as their revenue changes. This method helps in forecasting and planning, enabling contractors to determine how much they can spend on overhead while still remaining profitable. It provides a clearer picture of the relationship between revenue generation and operational costs, making it a strategic tool for managing finances in the contracting industry. In contrast to other methods, such as simply aggregating monthly expenses or dividing total costs by the number of employees, assessing overhead as a percentage of gross revenue gives a more dynamic view that aligns costs with income fluctuations. This allows for better resource allocation and financial planning in the long term.