The budgeted variable manufacturing overhead cost per unit is determined by dividing the total variable overhead by output quantity. The average fixed cost decreases as production increases, demonstrating the concept of 'spreading the overhead'. The average fixed cost curve is downward sloping, reflecting this principle.
- The budgeted variable manufacturing overhead cost per unit is calculated by dividing the total variable manufacturing overhead cost by the quantity of output produced.
- This calculation is part of managerial accounting and aids in understanding the costs associated with production at different output levels.
- When considering fixed costs, also known as 'overhead,' and their distribution over output, the concept of 'spreading the overhead' comes into play.
- Suppose the fixed cost, or overhead, is $1,000. If this cost is divided by the output quantity, we obtain the average fixed cost.
- As production quantity increases, the average fixed cost decreases because the fixed amount is spread over more units, illustrating the concept of 'spreading the overhead'.
- This means that the more you produce, the lower the fixed cost per unit.
- This relation is visually represented by the average fixed cost curve, which slopes downward as production increases.
- For example, if the fixed cost is $1,000 and the company produces 100 units, the average fixed cost per unit would be $10.
- However, if production increases to 200 units, the average fixed cost per unit drops to $5.
- This decrease as output increases is the essence of 'spreading the overhead.'