Final answer:
An equitable approach to allocating overhead uses broad averages that spread costs regardless of actual consumption. Breaking down costs into fixed, marginal, average total, and average variable costs can provide individual insights to a firm. Specifically, 'spreading the overhead' refers to the practice of diluting fixed costs across a larger number of units to reduce the average cost per unit.
Step-by-step explanation:
Allocating overhead costs using broad averages implies a simplistic approach where costs are spread equitably across units produced, regardless of how they are actually incurred. This method doesn't account for the variability in how different activities consume resources. Costs in business can be broken down into various categories such as fixed costs, marginal costs, average total costs, and average variable costs.
Each of these cost measures provides unique insights. Specifically, when talking about fixed costs also known as overhead, dividing this by the quantity of output results in the average fixed cost. For instance, if the fixed cost is $1,000, the average fixed cost curve would be a hyperbola, decreasing as production increases, showcasing the concept of spreading the overhead. This concept means that as more units are produced, the fixed cost per unit decreases, making each unit cheaper in terms of the overhead contribution.