Final answer:
To calculate the activity-based overhead rate for Ellsworth, Inc., divide the expected overhead cost by the expected number of inspections, resulting in $130 per inspection. Spreading the overhead implies that as more units are produced, the average fixed cost per unit decreases, leading to the hyperbolic shape of the average fixed cost curve.
Step-by-step explanation:
The student's question pertains to the calculation of the activity-based overhead rate within a managerial accounting context.
First, we need to understand that the activity-based overhead rate is calculated by dividing the expected overhead cost by the expected level of activity, which in this case is the number of inspections. So, for Ellsworth, Inc., the activity-based overhead rate is calculated as follows:
Activity-Based Overhead Rate = Expected Overhead Cost / Expected Number of Inspections
Activity-Based Overhead Rate = $520,000 / 4,000 inspections
The result is an activity-based overhead rate of $130 per inspection.
The concept of spreading the overhead refers to the distribution of fixed costs over the units produced. As more goods or services are produced, the average fixed cost per unit decreases because the total fixed costs are being spread over more units.
For example, suppose the fixed cost is $1,000. If only one unit is produced, the average fixed cost is the entire $1,000. However, if 100 units are produced, the average fixed cost drops to $10 per unit. Thus, the average fixed cost curve would be a hyperbola that approaches zero as the quantity of output increases. This demonstrates how fixed costs per unit decrease as production rises, a concept known as spreading the overhead.