Final answer:
The variable overhead spending variance accounts for both rate and quantity effects of variable overhead items. It is the combination of the rate variance and the efficiency variance. This helps organizations understand cost control in relation to variable overheads.
Step-by-step explanation:
The reflection of both price (rate) and efficiency (quantity) effects of variable overhead items is captured in the variable overhead spending variance. This variance combines both the variable overhead rate variance, which is the difference between the standard cost and the actual cost for the variable overhead rates, and the variable overhead efficiency variance, which measures the difference between the standard quantity of the variable overheads that should have been used for the actual output and the actual quantity used.
Fixed costs, also known as overhead, remain constant regardless of output levels. When dividing a fixed cost by the quantity of output produced, we get the average fixed cost. For a fixed cost of $1,000, the average fixed cost curve would slope downwards as output increases, reflecting the concept of spreading the overhead, which means that the fixed cost per unit decreases as more units are produced.
On the other hand, variable costs change in direct proportion to changes in output. Labor and raw materials are examples of variable costs. If the firm's average variable cost of production is lower than the market price, and fixed costs are excluded, the firm would be earning profits.