To which category is the Departmental overhead rate generally applied?

• A. Travel
• B. Equipment
• C. Materials
• D. Direct Project Labor

Answer: (D)

Indirect costs in a department are allocated to projects using a departmental overhead rate, and this rate is typically applied to the labor that actually performs the work. The reason is that the amount of direct project labor drives how much of the department’s overhead resources—such as supervision, facilities, utilities, and administrative support—is consumed. By basing the overhead allocation on direct project labor, the project’s total cost reflects both the explicit labor hours and the shared costs needed to support that labor. Travel, equipment, and materials are usually treated as direct costs or have their own allocation bases, so they aren’t the usual base for applying the departmental overhead rate.