Final answer:
Direct costing treats all fixed costs as period costs. It allocates fixed overhead to units produced, which results in a downward-sloping average fixed cost curve as production volumes increase. Cost measurements on a per-unit basis provide crucial insights for business decisions.
Step-by-step explanation:
The costing method that treats all fixed costs as period costs is direct costing, also known as variable costing. Under direct costing, only variable manufacturing costs are included in product costs while all fixed overhead costs are treated as period expenses and charged to the income statement in the period incurred.
Spreading the overhead means allocating fixed costs over the units produced. Hence, the average fixed cost curve depicts this allocation and tends to have a downward slope since the more units produced, the lower the average fixed cost per unit. If we have a fixed cost (overhead) of $1,000, and as production increases, the average fixed cost per unit decreases, illustrating economies of scale.
Measuring costs on a per-unit basis includes fixed costs, average cost, average variable cost, variable costs, and marginal cost. These measures provide various insights for decision-making within a business, such as pricing strategy or production levels. Understanding the difference in how variable and fixed costs behave with changes in output level is essential in managerial accounting and business decision-making.