Estimating Practice Exam

Which expense combines with the markup to include profit?

1. Direct Costs

2. Variable Costs

3. Fixed Costs

4. Company Overhead Costs

The correct answer is: Company Overhead Costs

The correct answer is that company overhead costs combine with markup to include profit because these costs reflect the necessary expenses that keep the business operational but are not directly linked to a specific project or job. Company overhead costs encompass expenses such as administrative staff salaries, office supplies, utilities, and other general business expenses. When calculating estimates for a project, it is crucial to add a markup to these costs to ensure that the overall pricing includes a profit margin. While direct costs relate directly to specific projects (like materials and labor specifically assigned to the job), and variable costs change depending on the level of production (such as raw materials), fixed costs remain constant irrespective of production levels but do not inherently reflect the profit. Therefore, overhead costs, when considered with markup, represent a comprehensive view of the expenses necessary to operate the company while incorporating profit into the planning and estimating process. This makes it essential for ensuring the financial health and sustainability of the business.