Final answer:
The Department Overhead Rate is determined by dividing fixed costs by the quantity of output, resulting in the average fixed cost. With a fixed cost of $1,000, as more units are produced, the average fixed cost decline.
Step-by-step explanation:
The concept being asked about pertains to the calculation of a Department Overhead Rate, which involves dividing overhead costs (fixed costs) by a selected base to distribute these costs across units produced. If, for example, we assume the fixed cost or overhead is $1,000, and it is divided by the quantity of output produced, we get the average fixed cost. The resulting curve of average fixed cost would show a continuous decline as the quantity of output increases. This decline is due to the spreading of a constant total amount over an increasing number of units, which effectively reduces the cost per unit. This process is known as 'spreading the overhead' since the same total cost is allocated over more units, hence decreasing the average fixed cost for each additional unit produced.
Spreading the overhead refers to the process of allocating the fixed cost or overhead expenses across the units produced. By dividing the fixed cost by the quantity of output produced, the average fixed cost is obtained. This helps in determining the cost per unit and understanding the impact of fixed costs on the overall cost structure of a product or service.