Final answer:
The correct answer is D. Factory overhead may be over or under applied due to variation in actual costs, unexpected costs, and variations in production volume. The average fixed cost curve is a downward-sloping curve, demonstrating that as output increases, the fixed cost per unit produced decreases, a concept referred to as spreading the overhead.
Step-by-step explanation:
Factory overhead can be over- or under-applied for a variety of reasons. It is the sum of all the indirect costs involved in running a production process that cannot be directly attributed to a specific product or job. These costs include things like utilities, depreciation on equipment, and salaries of maintenance personnel.
Some of the reasons why factory overhead might not align with the estimated costs include: A. Actual factory overhead costs can vary from the expected, as the estimates are based on forecasts that are not always accurate; B. Certain overhead costs may arise unexpectedly due to unforeseen circumstances; and C. The volume of production might vary from what was initially expected, resulting in a mismatch between estimated overhead costs and actual production volumes.
In terms of the average fixed cost curve, if the total fixed cost is $1,000, as output increases, the average fixed cost declines because the same amount of overhead is spread over more units of output. This concept is known as spreading the overhead. The average fixed cost curve is a downward-sloping curve, illustrating that as production increases, the fixed cost per unit decreases.