Final answer:
Fixed overhead is over-allocated and the variance is unfavorable if production volume is less than anticipated. The average fixed cost curve is a downward-sloping hyperbola that never touches the horizontal axis. 'Spreading the overhead' means that per unit overhead cost decreases as the quantity of output increases.
Step-by-step explanation:
If production volume is less than anticipated, then fixed overhead has been over-allocated and the fixed overhead volume variance is unfavorable. Fixed cost, also known as overhead, is constant regardless of the quantity of output produced. When you divide the fixed cost by the quantity of output produced, you get the average fixed cost. If we suppose the fixed cost is $1,000, the average fixed cost curve would typically appear as a hyperbola that approaches the horizontal axis but never touches it, sloping downward as output increases. This illustrates the concept of "spreading the overhead", which means that the per unit overhead cost decreases as production volume increases.
Moreover, in terms of business decisions, total revenue must exceed total costs for a firm to earn a profit. Since fixed costs, often considered sunk costs, cannot typically be recovered once spent, they should be ignored in the decision-making process concerning future actions. However, variable costs can be changed and therefore are important for a firm's ability to manage costs in the present and to understand how costs will fluctuate with changes in production volume.