Final answer:
Overhead costs in a job-order costing system with normal costing are applied to each job using a predetermined rate based on a cost driver. The average fixed cost curve shows a hyperbolic shape that decreases as output increases, reflecting the concept of spreading the overhead over more units. The term 'spreading the overhead' signifies the reduction in the fixed cost per unit as production volume increases.
Step-by-step explanation:
The student's question is regarding the accounting treatment of overheads in a job-order costing system following a normal costing approach. The correct statement about accounting for overheads in this context is that overhead is applied to each job using a predetermined rate. This approach allows businesses to assign overhead costs to products more accurately. The predetermined overhead rate is often based on a cost driver such as direct labor hours, machine hours, or any basis that is most correlated with the incurrence of overhead costs.
In practice, after determining the cost structure of a firm with both fixed and variable costs, businesses calculate total cost, average variable cost, average total cost, and marginal cost using given formulas. When a fixed cost, also known as overhead, such as $1,000, is divided by the quantity of output, we get the average fixed cost. As production increases, this average fixed cost decreases since the fixed cost is spread over more units, leading to what is termed as spreading the overhead.
The average fixed cost curve is typically a hyperbolic shape, decreasing as output increases. This reflects the idea of spreading the overhead, meaning that the fixed cost per unit is reduced as more units are produced, hence 'spreading' the cost across a greater number of units.