Question

What is the most common treatment of the fixed-overhead budget variance at the end of the accounting period?

1) Reported as a deferred charge or credit.
2) Allocated among Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold.
3) Charged or credited to Cost of Goods Sold.
4) Allocated among Cost of Goods Manufactured, Finished-Goods Inventory, and Cost of Goods Sold.
5) Charged or credited to Income Summary.

Answer 1

The average fixed cost when the fixed overhead is $1,000 will result in a hyperbolic curve that declines as output increases, which illustrates the concept of spreading the overhead.

Step-by-step explanation:

Fixed costs, commonly known as overhead, do not change with the level of production. One such example is the rent for a factory or retail space. When fixed cost is divided by the quantity of output produced, the result is the average fixed cost. If the fixed cost is $1,000, the average fixed cost curve will be a hyperbola, which means it continuously declines as output increases. This is because the constant total fixed cost is spread over an increasing number of units, decreasing the cost per unit. This concept is known as spreading the overhead, which indicates the distribution of fixed costs over the production volume, effectively reducing the average cost per unit with each additional unit produced.