Question

At the beginning of the year, Custom Manufacturing set its predetermined overhead rate using the following estimates: overhead costs, $1,120,000, and direct materials costs, $400,000.At year-end, the company reports that actual overhead costs for the year are $1,129,600 and actual direct materials costs for the year are $400,000.

Answer 1

Overhead, or fixed costs, divided by the quantity of output results in average fixed cost. The average fixed cost curve is hyperbolic, demonstrating that as production increases, the average cost per unit decreases, a concept known as spreading the overhead.

Step-by-step explanation:

The term overhead is commonly used to refer to fixed costs in a business setting. When fixed costs are divided by the quantity of output produced, the result is the average fixed cost. For instance, if a company has a fixed cost of $1,000, regardless of how many units are produced, this amount is spread over the total number of units produced. This process of allocation is known as spreading the overhead.

The average fixed cost curve typically appears as a hyperbolic shape when plotted on a graph, with the vertical axis representing average fixed costs and the horizontal axis representing quantity. As the quantity of output increases, the average fixed cost decreases because the fixed cost is spread over more units. This illustrates the concept of spreading the overhead: the more units produced, the lower the average cost per unit.