Final answer:
Variable costing treats fixed manufacturing overhead as a period cost, where these costs are not included in the product costs but are expensed in the period they are incurred. Fixed costs, also known as 'overhead,' when divided by output quantity give the average fixed cost, illustrating the 'spreading the overhead' concept.
Step-by-step explanation:
Variable costing treats fixed manufacturing overhead as a period cost. Under variable costing, fixed manufacturing overhead is not included in product costs, unlike traditional absorption costing. Instead, these costs are treated as expenses in the period they are incurred, regardless of the volume of production. This accounting practice contrasts with how fixed costs are treated, which are not dependent on output levels and remain constant even if the production volume varies. Fixed costs, often referred to as "overhead," include expenses like rent, machinery, and equipment that do not change in the short run irrespective of the output.
When you divide the total fixed costs by the quantity of output produced, you get the average fixed cost. If the fixed cost is $1,000, the average fixed cost curve would typically represent a hyperbola, declining as output increases. This reflects the concept of "spreading the overhead," which means that as more products are made, the fixed cost attributed to each unit decreases, allowing businesses to better absorb and distribute the fixed expenses over a larger number of goods.