Final answer:
Manufacturing overhead is recorded as a debit in the manufacturing overhead account, while actual costs are recorded as a credit. Overhead encompasses fixed costs, which do not affect future decisions, and variable costs, which have diminishing marginal returns. Firms experiment to find optimal production levels that impact profits by considering marginal cost and marginal revenue.
Step-by-step explanation:
Manufacturing overhead applied to production is typically recorded on the debit side of the manufacturing overhead account, and the credit side is used to record the actual manufacturing costs incurred. Manufacturing overhead encompasses all of the costs that are associated with the manufacturing process, excluding direct labor and direct materials. In accounting, applied manufacturing overhead represents an estimate used during the fiscal period to assign overhead costs to produced goods, while actual costs are recorded when they are substantiated. Overhead includes both fixed costs, such as rent for the manufacturing facilities which stay constant regardless of the output produced, and variable costs, which are costs that change in proportion with the level of output.
Fixed costs are considered sunk costs; they have already been incurred and cannot be changed, so they should not influence future economic decisions about production or pricing. Variable costs, however, often exhibit diminishing marginal returns, implying that as production increases, the additional cost for producing one more unit (marginal cost) tends to go up.
Firms may not always have complete data to draw a total cost curve for all levels of production. In practice, firms experiment by adjusting production levels to observe how changes impact profits, effectively focusing on how production levels influence marginal revenue and marginal cost to maximize profits.