Question

When allocating fixed manufacturing overhead cost to units under absorption costing, the total fixed overhead costs must be divided by the number of units (1). (Enter only one word per blank.)

Answer 1

When allocating fixed manufacturing overhead cost to units under absorption costing, the average fixed cost curve looks like a hyperbola that slopes downward as production increases. 'Spreading the overhead' means reducing the average fixed cost per unit by increasing production, which reduces the per-unit cost of overhead.

Step-by-step explanation:

Under absorption costing, when allocating fixed manufacturing overhead cost to units, the total fixed overhead costs must be divided by the number of units produced. Suppose the fixed cost is $1,000. When this cost is divided by the increasing number of units produced, the average fixed cost per unit decreases.

The average fixed cost curve will be a hyperbola that slopes downwards as production increases, since the fixed cost of $1,000 is spread over more units. This phenomenon of reducing average fixed cost by increasing production is known as spreading the overhead. The concept encourages producing in larger quantities to reduce the per-unit cost of overhead.

Note that the marginal cost of the first unit of output is the same as the total cost since there are no other units to spread the fixed costs over, making the marginal cost for the first unit equal to the average fixed cost.