Final answer:
The manufacturing overhead costs of Frenzy Company are overapplied by $7,000. 'Spreading the overhead' refers to allocating the fixed costs across the output, decreasing the average fixed cost per unit as production increases. The average fixed cost curve is downward sloping due to this effect.
Step-by-step explanation:
The student is asking about the calculation of manufacturing overhead costs using a predetermined overhead rate based on direct labor costs. Frenzy Company uses a predetermined overhead rate of 140% of direct labor costs. With $90,000 of total factory labor costs, $10,000 of which was indirect, the direct labor costs amount to $80,000 (since total factory labor costs include both direct and indirect labor). The predetermined overhead rate applied to the direct labor costs would be 140% of $80,000, which equals $112,000.
Since the actual overhead incurred is $119,000, the manufacturing overhead costs are overapplied. Overapplied overhead means that the amount of overhead applied to products or services, using the predetermined overhead rate, is more than the actual overhead incurred. Therefore, the company's manufacturing overhead cost is 'Overapplied by $7,000', as the predetermined overhead ($112,000) is less than the actual overhead by $7,000.
To conclude, 'spreading the overhead' refers to allocating the fixed costs over the quantity of output. If a firm has a fixed cost (overhead) of $1,000, and the quantity of output increases, the average fixed cost decreases. This is because the fixed cost is being spread over more units, thereby reducing the cost per unit. The average fixed cost curve will be downward sloping, showcasing that as output increases, the average fixed cost per unit declines.