Final answer:
The term for the proportion of overhead activity consumed by a product is the consumption ratio. Understanding this helps businesses allocate overhead costs to products accurately and influence pricing strategies. Option a. is correct answer.
Step-by-step explanation:
The proportion of each overhead activity consumed by a product is known as the consumption ratio. It's a critical metric in cost accounting and management, assisting businesses in allocating overhead costs to products more accurately based on the extent to which each product utilizes the overhead activities. Knowing the consumption ratio helps in understanding the cost structure and setting the pricing strategies for products or services.
In the business and economics context, understanding cost structures and the influence of monopoly powers is essential. For example, the four-firm concentration ratio sheds light on the market dominance by revealing the percentage of total sales controlled by the top four firms in an industry.
This insight can influence strategic decision-making, especially in industries with high fixed costs, commonly referred to as 'overhead.' Similarly, strategies like bundling, where multiple products are sold as one, and practices such as exclusive dealing can also affect how overhead costs are managed and products are priced.
Moreover, cost allocation approaches like cost-plus regulation allow regulated firms to cover their overhead costs while earning a normal level of profit. This interacts with the concept of spreading overhead, which involves distributing fixed costs across various outputs, effectively reducing the average fixed cost per unit as production increases.