Final answer:
To allocate overhead costs for Product A and B using activity-based costing, detailed cost and activity data are required. Overhead costs are allocated by identifying activities, determining cost drivers, and multiplying the cost driver rate by the quantity used by each product. Economies of scale play a role in reducing average fixed costs and increasing profitability.
Step-by-step explanation:
To calculate the overhead cost allocation for both Product A and Product B using activity-based costing (ABC), you will need detailed information about the overhead costs and the activities that drive those costs. Activity-based costing allocates overhead costs to products based on the activities required to produce each product. First, identify the total overhead costs and the different activities that cause overhead to be incurred. Then, determine the cost driver for each activity. Next, compute the cost driver rate by dividing the total cost for each activity by the total quantity of cost drivers. Finally, assign the overhead costs to each product by multiplying the cost driver rate by the quantity of cost drivers used by each product.
A fixed cost, commonly referred to as overhead, divided by the quantity of output produced results in the average fixed cost. For example, if the fixed cost is $1,000 and the output is 100 units, the average fixed cost is $10 per unit. As you increase production, this cost is spread over more units, reducing the average cost per unit. The average fixed cost curve is typically downward sloping, reflecting the spreading of overhead.
Average total cost (ATC) is calculated by dividing the total cost by the total output at each level of output. The ATC curve is typically U-shaped, which shows economies of scale at lower levels of production and diseconomies of scale at higher levels.
Understanding these concepts is crucial because if a firm's average cost of production is lower than the prevailing market price, the firm will be making a profit. By effectively spreading the overhead and achieving economies of scale, a firm can reduce its average costs and increase profitability.
To properly allocate overhead costs in an ABC system, you will need to know the specific overhead costs, the activities that cause these costs, the cost drivers for each activity, and the amount of each cost driver consumed by Products A and B. Without this information, it is impossible to accurately allocate overhead costs to the products.