Final answer:
The manufacturing overhead variance can be broken down into favorable and unfavorable variances. The concept of 'spreading the overhead' refers to allocating fixed costs over more units produced, reducing the average fixed cost per unit. This contributes to understanding costs like average total cost, average variable cost, and marginal cost.
Step-by-step explanation:
The manufacturing overhead variance can indeed be broken down into two primary components, which are C) Favorable variance and unfavorable variance. These variances indicate whether the actual overhead costs were higher or lower than the estimated overhead costs during a given period. Manufacturing overhead includes all the costs associated with producing a product aside from direct labor and direct materials. This encompasses both fixed costs, such as building rent and equipment depreciation, and variable costs, which fluctuate with the level of production, like utility costs.
The concept of spreading the overhead relates to distributing fixed costs (often referred to as overhead) across the number of units produced. If a company has a fixed cost of $1,000, the average fixed cost would decrease as the production quantity increases since that $1,000 is being allocated over more units. Therefore, the average fixed cost curve typically has a downward slope, reflecting the decrease in average fixed cost per unit with increased production.
Understanding Average Total Cost, Average Variable Cost, and Marginal Cost is also crucial for businesses. These costs are calculated on a per-unit basis and are essential in pricing, budgeting, and financial decision-making.