Question

All indirect manufacturing costs are commonly combined into a single cost pool called:

A. Activity cost pools.
B. Value streams.
C. Resources.
D. Overhead.
E. Other manufacturing costs.

Answer 1

All indirect manufacturing costs are typically combined under the term 'overhead'. The average fixed cost curve is hyperbolic and decreasing as production goes up, explaining the concept of 'spreading the overhead', which illustrates economies of scale.

Step-by-step explanation:

All indirect manufacturing costs are commonly combined into a single cost pool called overhead. Overhead, or fixed costs, are expenditures that do not change regardless of the production level. If you divide fixed cost by the quantity of output produced, you get the average fixed cost. Suppose the fixed cost is $1,000. The average fixed cost curve typically looks like a hyperbola, declining as output increases.

'Spreading the overhead' refers to the way fixed costs per unit decrease as production increases, because the total fixed cost is distributed over a larger number of units. For example, if fixed costs are $1,000 and 10 units are produced, the average fixed cost is $100 per unit. If 100 units are produced, the average fixed cost is reduced to $10 per unit. This is a clear demonstration of economies of scale, where increasing production leads to lower average costs per unit.