Question

4) When *fixed overhead spending variance* is *unfavorable*, it can be safely assumed that ________.

A) flexible budget amount is higher than actual costs incurred
B) fixed overhead allocated for actual output is lower than actual costs incurred
C) flexible budget amount is lower than actual costs incurred
D) fixed overhead allocated for actual output is higher than actual costs incurred

Answer 1

When fixed overhead spending variance is unfavorable, it indicates that the fixed overhead allocated for actual output is lower than the actual costs incurred. This reflects a situation where the company spends more on fixed costs than anticipated. 'Spreading the overhead' means allocating fixed costs across a larger number of units, which results in a lower average fixed cost per unit.

Step-by-step explanation:

When the fixed overhead spending variance is unfavorable, it can be safely assumed that the fixed overhead allocated for actual output is lower than actual costs incurred. This situation indicates that the company had budgeted less in fixed overhead costs than what was actually spent. Fixed costs, also known as overhead, such as factory rent or the cost of machinery, do not change with the level of production in the short run. Therefore, the average fixed cost decreases as production increases because the total fixed cost is spread over a larger number of units, which is referred to as "spreading the overhead". The average fixed cost curve, when plotted against output, will be downward sloping because as more units are produced, the fixed cost per unit falls.