Question

A) Actual Costs Incurred: 63,916

b) Same budgeted lump sum regardless of output level: 62,400
c) Flexible Budget: same budgeted lump sum regardless of output level: 62,400
d) Allocated Overhead: 64,800 (15 from below * budgeted labor hour * actual units started and completed)
Budgeted fixed overhead per unit: 15 (fixed overhead costs / (Budgeted labor hour*budgeted output))

Spending Variance: 1,516 U (actual costs incurred - flexible budget)

Answer 1

The average fixed cost represents the fixed cost per unit of output and decreases as production increases due to the spreading of overhead. This means allocating the total fixed costs over more units, resulting in a lower average fixed cost with increased output.

Step-by-step explanation:

The question revolves around the concept of fixed costs or overhead, which are costs that do not vary with the level of output produced. When discussing the average fixed cost, this refers to the fixed cost per unit of output, which is calculated by dividing the total fixed cost by the quantity of output produced. If we assume a fixed cost of $1,000, the average fixed cost curve would be a hyperbolic shape because as the quantity of output increases, the average fixed cost decreases due to the spreading effect of the fixed overhead over more units.

The term spreading the overhead means allocating the total fixed costs over the units produced. This results in a decreasing average fixed cost as production increases. For instance, if a barbershop has fixed costs of $160 per day, this cost is spread across the number of haircuts provided. Hence, more haircuts mean a lower average fixed cost for the barbershop.

It's crucial to understand these concepts to manage and predict the financial aspects of a business efficiently. Businesses leverage the spreading of overhead to reduce the per-unit cost of their products or services by increasing output, optimizing their production processes.