Final answer:
The fixed-overhead budget variance is most commonly allocated among Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold. Fixed costs, also known as overhead, when divided by the quantity of output, yield the average fixed cost, which decreases per unit as production increases, demonstrating the principle of 'spreading the overhead.'
Step-by-step explanation:
The most common treatment of the fixed-overhead budget variance at the end of the accounting period is to allocate it among Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold. This approach recognizes that fixed overhead costs are associated with the production process and should be assigned to the costs of the products produced during the period. These variances are apportioned to the products whether they are still in production, finished, or have been sold.
Fixed costs, also known as overhead, remain constant regardless of changes in the level of production. When you divide the total fixed cost by the quantity of output produced, you get the average fixed cost. For instance, if the fixed cost is $1,000 and the company produces 10 units, the average fixed cost per unit is $100, but if the company produces 100 units, the average fixed cost per unit drops to $10.
The average fixed cost curve typically appears as a downward-sloping curve on a graph, representing the effect of spreading the overhead over an increasing number of units. This illustrates the principle of spreading the overhead, which means the more units produced, the lower the cost per unit because the total fixed costs are distributed across a larger quantity of output.