Question

A fixed-overhead volume variance would normally arise when:

A. actual hours of activity coincide with actual units of production.
B. budgeted fixed overhead is overapplied to production.
C. there is a fixed-overhead budget variance.
D. actual fixed overhead exceeds budgeted fixed overhead.
E. there is a variable-overhead efficiency variance.

Answer 1

A fixed-overhead volume variance arises when budgeted fixed overhead is overapplied. The average fixed cost curve is a hyperbola that declines as production increases, demonstrating 'spreading the overhead.'

Step-by-step explanation:

A fixed-overhead volume variance normally arises when budgeted fixed overhead is overapplied to production. Fixed costs, commonly referred to as "overhead," do not change regardless of the level of production. When fixed costs are spread over a greater number of units, the average fixed cost per unit decreases. For example, if the supposed fixed cost is $1,000, as production increases, the average fixed cost per unit declines. This phenomenon is referred to as "spreading the overhead."

The average fixed cost curve would be a hyperbola, starting high when a few units are produced and declining as more units are produced. This graphical representation shows the inverse relationship between the quantity produced and the average fixed cost per unit.

Understanding the behavior of fixed costs is crucial for businesses as it affects pricing strategies, cost management, and profitability analyses. It can also influence decisions related to production scales and capital investments.