Final answer:
The formula represents the variable overhead efficiency variance in business. A fixed cost, also known as overhead, when divided by the quantity of output, defines the average fixed cost. Spreading the overhead means that as the quantity of output increases, the fixed cost contribution per unit decreases.
Step-by-step explanation:
The formula (SH - AH) × SR represents the variable overhead efficiency variance. In this context, SH stands for the standard hours for actual production, AH is the actual hours worked, and SR is the standard rate per hour. If SH is greater than AH, it implies that less time was needed than anticipated to produce the output, which typically results in a favorable efficiency variance. Conversely, if AH is greater than SH, more time was taken than expected, leading to an unfavorable efficiency variance.
When dealing with fixed costs, also known as overhead, these costs do not change with the level of output. The average fixed cost curve, when graphed, shows a continually decreasing pattern as output increases. This decrease occurs because the same total fixed cost is spread over more units of output. This is what "spreading the overhead" means—as production increases, each unit bears a smaller portion of the fixed cost, thus lowering the average fixed cost per unit.