Question

The cost of goods that have been sold, after an adjustment is made for the period's overhead variance, is called the

a. adjusted cost of goods sold.
b. normal cost of goods sold.
c. finished goods cost flow.
d. actual overhead.

Answer 1

The average fixed cost, or overhead, is calculated by dividing the fixed costs by the output quantity and is represented by a downward-sloping curve. Spreading the overhead refers to allocating the fixed costs across the units produced, reducing the average cost per unit as production increases.

Step-by-step explanation:

A common name for fixed cost is "overhead." When we divide fixed costs by the quantity of output produced, we obtain the average fixed cost. If we assume a fixed cost of $1,000, the average fixed cost curve appears as a downward-sloping curve that approaches closer to zero as production increases. This representation is because, with every additional unit produced, the fixed cost is spread over more units, thus decreasing the average fixed cost per unit.

Explaining "spreading the overhead" implies allocating the total fixed costs over the number of goods produced so that each unit absorbs a portion of the overall fixed costs. This term is critical in understanding how producing more goods can reduce the average cost and improve a firm's profitability, especially when discussing concepts like economies of scale and diseconomies of scale.

It's also important to distinguish between different types of costs and their behavior. While fixed costs remain constant regardless of output levels, variable costs increase with an increase in production. Explicit costs are out-of-pocket costs, such as payments for wages and salarie, rent, or materials which a firm can easily calculate and attribute to a product's production.