Final answer:
Overapplied factory overhead results in a credit balance in the Factory Overhead account, indicating that the applied costs are higher than the actual costs. The average fixed cost curve, based on a fixed cost of $1,000, is a downward sloping curve that approaches zero as output increases. 'Spreading the overhead' refers to allocating fixed costs over more units, reducing the cost per unit.
Step-by-step explanation:
When factory overhead is overapplied, it means that the applied overhead costs are greater than the actual overhead costs. This situation results in the Factory Overhead account having a credit balance because the company has applied more overhead to products than it has actually incurred in expenses. Overapplied overhead can occur from an overestimation of the overhead costs during the budgeting process or when actual costs are lower than expected.
An average fixed cost curve shows the relationship between the total fixed cost and the quantity of output produced. Given a fixed cost of $1,000, as the quantity of output increases, the average fixed cost decreases. This is because the fixed cost is spread over more units of output. The curve is a rectangular hyperbola, which means it is downward sloping, approaching zero but never touching either axis.
The term "spreading the overhead" means allocating the total fixed cost over the number of units produced. As production increases, each unit carries a smaller portion of the fixed cost, making the cost per unit cheaper. This is beneficial in a high volume production environment where spreading the overhead can significantly reduce the cost per unit.