Question

The following information for the past year is available from Gas Company, a company that uses machine hours to apply standard factory overhead cost to outputs: under a two-variance breakdown (decomposition) of the total factory overhead variance, the factory overhead efficiency variance (to the nearest whole dollar) is:

A) $X
B) $Y
C) $Z
D) $W

Answer 1

The average fixed cost (AFC) curve is a hyperbola that decreases as output increases, illustrating the concept of "spreading the overhead" where fixed costs per unit decrease with higher production.

Step-by-step explanation:

When businesses incur a fixed cost, commonly known as overhead, it remains constant regardless of the quantity of output produced. By dividing the fixed cost by the quantity of output, we obtain the average fixed cost (AFC). If the fixed cost is $1,000, the AFC curve would be a hyperbola, starting high when production volumes are low and decreasing as production increases. This phenomenon demonstrates the concept of "spreading the overhead", which refers to reducing the average fixed cost per unit as production scales up.

Understanding Average Fixed Costs

For instance, if only 10 units are produced, the AFC is $100 per unit ($1,000/10). However, if production is increased to 100 units, the AFC drops to $10 per unit ($1,000/100). This illustrates economies of scale, where increasing the scale of production leads to a lower average cost of production due to the fixed costs being spread over more units.

The curve representing average fixed costs is inversely proportional to output, visually represented as a downward-sloping curve on a graph where the quantity of output is on the horizontal axis and the AFC is on the vertical axis. The curve approaches, but never reaches, zero as production increases infinitely.