Final answer:
Variable costing treats all fixed costs as period costs, where fixed costs such as overhead are not allocated to products. The average fixed cost curve shows a hyperbolic decrease as quantity of output increases, illustrating the concept of spreading the overhead. This understanding is vital for firms to make strategic production and pricing decisions.
Step-by-step explanation:
The costing method that treats all fixed costs as period costs is referred to as variable costing or direct costing. In these costing methods, fixed costs, often known as overhead, are not allocated to products but are treated as expenses of the period they occur in.
Now, considering a scenario where fixed cost is $1,000, to find the average fixed cost (AFC), you would divide the fixed cost by the quantity of output produced. As production increases, the AFC decreases because the fixed cost is spread over more units.
Therefore, the average fixed cost curve is a hyperbola that slopes downward as output increases, which visually represents the concept of spreading the overhead. This term refers to the process of allocating fixed costs over a larger number of units, thereby reducing the cost per unit.
Understanding different measures of costs like fixed cost, marginal cost, average total cost, and average variable cost is crucial for a firm to make informed decisions about production and pricing.