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THEORY 7. Uniformly assigning the costs of resources to cost objects when those resources are actually
1. Which of the following statements is true? used in a nonuniform way is called
A. Costs that are indirect to products are traceable to some activity. A. department costing. C. peanut-butter costing.
B. The traditional approach to costing uses many different cost drivers. B. overcosting. D. undercosting.
C. Costs that are indirect to products are by definition traceable directly to products.
D. All of the above statements are true. 8. Which of the following is NOT a trait of a traditional cost management system?
A. allocation intensive C. narrow and rigid product costing
2. Mass customization can be achieved through the use of B. focus on managing activities D. unit-based drivers
A. Activity-based costing. C. Just-in-time inventory.
B. Flexible manufacturing systems. D. all of the above. 9. Symptoms of an outdated cost system include all of the following EXCEPT
A. competitors prices appear unrealistically low.
3. Process value analysis is a key component of activity-based management that links product B. products that are difficult to produce show little profit.
costing and C. the company has a highly profitable niche all to itself.
A. Continuous improvement. D. product costs change because of changes in financial reporting.
B. Reduction of the number of cost pools.
C. Overhead rates based on broad averages. 10. Which of the following is NOT a sign of poor cost data?
D. Accumulation of heterogeneous cost pools. A. The company seems to have a highly profitably niche all to itself.
B. Customers dont balk at price increases for low-volume products.
4. An approach to developing new ways to perform existing activities is called C. Competitors prices for low-volume products appear much too high.
A. Benchmarking. C. Process value analysis. D. Competitors prices for high-volume products appear much too high.
B. Caveat analysis. D. Re-engineering.
11. Traditionally, managers have focused cost reduction efforts on
5. A(n) _______________ method first traces costs to a department and then to products. A. activities. C. departments.
A. absorption costing C. direct costing B. costs. D. processes.
B. activity-based costing D. traditional costing
12. An objective of activity-based management is to
6. Traditional overhead allocations result in which of the following situations?
A. eliminate the majority of centralized activities in an organization.
A. The resulting allocations cannot be used for financial reports.
B. institute responsibility accounting systems in decentralized organizations.
B. Overhead costs are assigned as period costs to manufacturing operations.
C. reduce or eliminate non-value-added activities incurred to make a product or provide a
C. Low-volume products are assigned too much, and high-volume products are assigned too
service.
little overhead.
D. all of the above
D. High-volume products are assigned too much overhead, and low-volume products are
assigned too little overhead.
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13. A(n)_______________ method first traces costs to activities and then to products. 18. A basic assumption of activity-based costing (ABC) is that
A. absorption costing C. direct costing A. Only variable costs are included in activity-cost pools.
B activity-based costing D. traditional costing B. All manufacturing costs vary directly with units of production.
C. Only costs that respond to unit-level drivers are product costs.
14. An accounting system that collects financial and operating data on the basis of the underlying D. Products or services require the performance of activities, and activities consume
nature and extent of the cost drivers is resources.
A. Activity-based costing. C. Direct costing.
B. Cycle-time costing. D. Variable costing. 19. Book Co. uses the activity-based costing approach for cost allocation and product costing
purposes. Printing, cutting, and binding functions make up the manufacturing process.
15. Activity-based costing and generally accepted accounting principles differ in that ABC Machinery and equipment are arranged in operating cells that produce a complete product
A. does not define product costs in the same manner as GAAP. starting with raw materials. Which of the following are characteristic of Boos activity-based
B. cannot be used to compute an income statement, but GAAP can. costing approach?
C. information is useful only to managers, while GAAP information is useful to all I. Cost drivers are used as a basis for cost allocation.
organizational stakeholders. II. Costs are accumulated by department or function for purposes of product costing.
D. is concerned only with costs generated from automated processes, but GAAP is III. Activities that do not add value to the product are identified and reduced to the extent
concerned with costs generated from both manual and automated processes. possible.
A. I only. C. I and III.
16. Design of an ABC system requires B. I and II. D. II and III.
A. an adjustment to product mix.
B. that the job bid process be redesigned. 20. The UNIQUE feature of an ABC system is the emphasis on
C. that a cause-and-effect relationship exists between resource costs and individual A. costing individual jobs. C. individual activities.
activities. B. department indirect-cost rates. D. multiple-cost pools.
D. both (A) and (C).
21. ABC should be used in which of the following situations?
17. In an activity-based costing system, what should be used to assign a departments A. in all manufacturing firms
manufacturing overhead cost to products produced in varying lot sizes? B. single-product firms with multiple steps
A. A single cause and effect relationship. C. multiple-product firms with only a single process
B. Multiple cause and effect relationships. D. multiple-product firms with multiple processing steps
C. Relative net sales values of the products.
D. A products ability to bear cost allocations. 22. In activity-based costing, preliminary cost allocations assign costs to
A. activities. C. processes.
B. departments. D. products.

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23. In activity-based costing, final cost allocations assign costs to 28. The resource utilized by a given product divided by the total amount of the resource available
A. activities. C. processes. is called the
B. departments. D. products. A. Activity driver. C. Cost object.
B. Consumption ratio. D. Sustaining activity.
24. ABC systems create
A. one large cost pool. 29. In Activity-based Costing, which of the following would be considered a value-added activity?
B. activity-cost pools with a broad focus. A. Bookkeeping. C. Repair of machines.
C. homogenous activity-related cost pools. B. Engineering designs. D. Storage of inventory.
D. activity-cost pools containing many direct costs.
30. In the pharmaceutical or food industries, quality control inspections would most likely be
25. What is the normal effect on the numbers of cost pools and allocation bases when an activity- viewed as
based cost (ABC) system replaces a traditional cost system? A. business-value-added activities. C. process-efficiency activities.
A. B. C. D. B. non-value-added activities. D. value-added-activities.
Cost Pools Increase Increase No effect No effect
Allocation Bases Increase No effect Increase No effect 31. All of the following are examples of non-value-added activities except:
A. assembling C. handling
26. If activity-based costing is implemented in an organization without any other changes being B. expediting D. reworking
effected, total overhead costs will
A. remain constant and simply be spread over products differently. 32. The ideal standard quantity for nonvalue-added activities is
B. be reduced because of the elimination of non-value-added activities. A. zero
C. be reduced because organizational costs will not be assigned to products or services. B. practical capacity
D. be increased because of the need for additional people to gather information on cost C. the currently attainable quantity standard
drivers and cost pools. D. the cost of resources acquired in advance of usage

27. The use of activity-based costing normally results in 33. The following items are used in tracing costs in an ABC system. In which order are they used?
A. Equalizing setup costs for all product lines. (1) cost object (3) activity driver
B. Decreased setup costs being charged to low-volume products. (2) cost driver (4) cost pool
C. Substantially greater unit costs for low-volume products than is reported by traditional
product costing. A. 1, 2, 3, 4 C. 2, 4, 3, 1
D. Substantially lower unit costs for low-volume products than is reported by traditional B. 2, 3, 4, 1 D. 4, 3, 1, 2
product costing.

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34. An item or event that has a cause-effect relationship with the incurrence of a variable cost is 40. Unit-level cost drivers are most appropriate as an overhead assignment base when
called a A. direct labor costs are low.
A. cost driver. C. mixed cost. B. only one product is manufactured.
B. direct cost. D. predictor. C. factories produce a varied mix of products.
D. several complex products are manufactured.
35. Which of the following is typically regarded as a cost driver in traditional accounting practices?
A. number of customers served 41. All of the following are unit-based activity drivers EXCEPT
B. number of direct labor hours worked A. direct labor hours C. number of setups
C. number of purchase orders processed B. machine hours D. number of units
D. number of transactions processed
42. All of the following are nonunit-based activity drivers EXCEPT
36. A cost pool is A. number of direct labor hours C. number of material moves
A. All costs that have the same driver. B. number of inspections D. number of setups
B. All of the costs of a particular department.
C. All costs related to a product or product line. 43. _____ are those performed each time a unit is produced or sold.
D. All costs in a group such as variable costs or discretionary fixed costs. A. Batch-level activities. C. Sustaining activities.
B. Facility-sustaining activities. D. Unit-level activities.
37. The activities that drive resource requirements are called the
A. Activity drivers. C. Resource drivers. 44. Examples of activities at the unit level of costs include:
B. Cost objects. D. Sustaining activities. A. heating, lighting, and security C. scheduling, setting up, and moving
B. cutting, painting, and packaging D. designing, changing, and advertising
38. Products make diverse demands on resources because of differences in all of the following
EXCEPT 45. In allocating variable costs to products,
A. batch size. C. selling price. A. a volume-based cost driver should be used.
B. complexity. D. volume. B. a company should never use more than one cost driver.
C. direct labor hours should always be used as the allocation base.
39. __________________ are causal factors that explain the consumption of overhead. D. a company should use the same allocation base that it uses for fixed costs.
A. Activity drivers C. Cost objectives
B. Cost catchers D. Cost pools 46. _____ are those that a company performs when it makes a group of units .
A. Batch-level activities. C. Sustaining activities.
B. Facility-sustaining activities. D. Unit-level activities.

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47. Examples of activities at the batch level of costs include: 54. Examples of activities at the plant level of costs include:
A. heating, lighting, and security C. scheduling, setting up, and moving A. cutting, painting, and packaging C. heating, lighting, and security
B. cutting, painting, and packaging D. designing, changing, and advertising B. designing, changing, and advertising D. scheduling, setting up, and moving

48. If JIT manufacturing is used, maintenance of the production equipment would be classified as
a PROBLEMS
A. cell-level activity C. product-level activity 1. A time-and-motion study revealed that it should take 1 hour to produce a product that currently
B. facility-level activity D. unit-level activity takes 3 hours to produce. Labor is $8 per hour. Nonvalue-added costs are
A. $0 C. $16
49. Testing a prototype of a new product is an example of a B. $8 D. $24
A. Batch-level activity. C. Product-level activity.
B. Organization-sustaining activity. D. Unit-level activity. 2. Setup time for a product is six hours. A firm that uses JIT and produces the same product has
reduced setup time to 30 minutes. Setup labor is $24 per hour. Value-added costs are
50. Examples of activities at the product level of costs include: A. $12 C. $132
A. cutting, painting, and packaging C. heating, lighting, and security B. $24 D. $144
B. designing, changing, and advertising D. scheduling, setting up, and moving
3. Each unit of product requires 8 gallons of raw material. Due to scrap and rework, each unit has
51. Which of the following is not a type of sustaining activity? been averaging 9 gallons of raw material. The raw material costs $4 per gallon. Value-added
A. Capacity-sustaining. C. Distribution-channel sustaining. costs are
B. Customer-sustaining. D. Unit-sustaining. A. $2 C. $32
B. $4 D. $36
52. _____ relate to an entire plant as a whole.
A. Batch-level activities. C. Sustaining activities. 4. A company keeps 20 days of raw materials inventory on hand to avoid shutdowns due to raw
B. Facility-sustaining activities. D. Unit-level activities. materials shortages. Carrying costs average $2,000 per day. A competitor keeps 10 days of
inventory on hand the competitors carrying costs average $1,000 per day. Value-added costs
53. Which of the following statements about activity-based costing is not true? are
A. In activity-based costing, cost drivers are what cause costs to be incurred. A. $0 C. $20,000
B. Activity-based costing is useful for allocating marketing and distribution costs. B. $10,000 D. $40,000
C. Activity-based costing differs from traditional costing systems in that products are not
cross-subsidized. 5. New Rage Cosmetics has used a traditional cost accounting system to apply quality control
D. Activity-based costing is more likely to result in major differences from traditional costing costs uniformly to all products at a rate of 14.5% of direct labor cost. Monthly direct labor cost
systems if the firm manufactures only one product rather than multiple products. for Satin Sheen makeup is $27,500. In an attempt to distribute quality control costs more

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equitably, New Rage is considering activity-based costing. The monthly data shown in the Accordingly, the ABC analysis indicates that the daily costing rate should be
chart below have been gathered for Satin Sheen. A. $620.00 for all occupants.
Quantity for B. $182.50 for occupants in the low-usage category.
Activity Cost Driver Cost Rates Satin Sheen C. $245.00 for occupants in the high-usage category.
Incoming material inspection Type of material $11.50 per type 12 types D. $145.00 for occupants in the medium-usage category.
In-process inspection Number of units $0.14 per unit 17,500 units
Product certification Per order $77per order 25 orders Questions 7 thru 9 are based on the following information.
The monthly quality control cost assigned to Satin Sheen makeup using activity-based costing Dierich Company uses an activity-based costing system with three activity cost pools. The
is company has provided the following data concerning its costs and its activity based costing
A. $8,500.50 system:
B. $88.64 per order. Costs:
C. $525.50 lower than the cost using the traditional system. Manufacturing overhead $600,000
D. $525.50 higher than the cost using the traditional system. Selling and admin. expenses $220,000
Total $820,000
6. ALF Co. is an assisted-living facility that provides services in the form of residential space, Distribution of resource consumption:
meals, and other occupant assistance (OOA) to its occupants. ALF currently uses a traditional Activity Cost Pools
cost account system that defines the service provided as assisted living, with service output Order Size Customer Support Other Total
measured in terms of occupant days. Each occupant is charged a daily rate equal to ALFs Manufacturing overhead 15% 75% 10% 100%
annual cost of providing residential space, meals and OOA divided by total occupant days. Selling and admin. Expenses 60% 20% 20% 100%
However, an activity-based costing (ABC) analysis has revealed that occupants use of OOA The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining
varies substantially. This analysis determined that occupants could be grouped into three costs. You have been asked to complete the first-stage allocation of costs to the activity cost
categories (low, moderate, and high usage of OOA) and that the activity driver of OOA is pools.
nursing hours. The driver of the other activities is occupant days. The following quantitative
7. How much cost, in total, would be allocated in the first-stage allocation to the Order Size
information was also provided:
activity cost pool?
Occupant category Annual Occupant Days Annual Nursing Hours
A. $123,000 C. $307,500
Low Usage 36,000 90,000
B. $222,000 D. $492,000
Medium Usage 18,000 90,000
High Usage 6,000 120,000
8. How much cost, in total, should NOT be allocated to orders and products in the second stage
60,000 300,000
of the allocation process if the activity-based costing system is used for internal decision-
The total annual cost of OOA was $7.5 million, and the total annual cost of providing
making?
residential space and meals was $7.2 million.
A. $0. C. $104,000.
B. $82,000. D. $164,000.
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9. How much cost, in total, would be allocated in the first-stage allocation to the Customer 12. What is the cost assigned to the training employees activity?
Support activity cost pool? A. $55,000 C. $162,500
A. $164,000 C. $494,000 B. $62,500 D. $250,000
B. $389,500 D. $615,000
13. What is the cost assigned to the designing tooling activity?
Questions 10 through 13 are based on the following information. A. $50,000 C. $162,500
Zebra Corporation has the following activities: creating bills of materials (BOM), studying B. $66,000 D. $250,000
manufacturing capabilities, improving manufacturing processes, training employees, and designing
tooling. The general ledger accounts reveal the following expenditures for manufacturing Questions 14 through 16 are based on the following information.
engineering: A company has identified the following overhead costs and cost drivers for the coming year.
Salaries $150,000 Overhead Item Cost Driver Budgeted Cost Budgeted Activity Level
Equipment 80,000 Machine setup No. of setups $ 20,000 200
Supplies 20,000 Inspection No. of inspections $130,000 6,500
Total $250,000 Material handling No. of material moves $ 80,000 8,000
The equipment is used for two activities: improving processes and designing tooling. Thirty-five Engineering Engineering hours $ 50,000 1,000
percent of the equipments time is used for improving processes and sixty-five percent is used for $280,000
designing tools. The salaries are for two engineers. One is paid $100,000, while the other earns The following information was collected on three jobs that were completed during the year:
$50,000. The $100,000 engineer spends 40% of his time training employees in new processes and Job 101 Job 102 Job 103
60% of his time on improving processes. The remaining engineer spends equal time on all Direct materials $5,000 $12,000 $8,000
activities. Supplies are consumed in the following proportions: Direct labor $2,000 $ 2,000 $4,000
Creating BOMs 25% Units completed 100 50 200
Studying capabilities 10% Number of setups 1 2 4
Improving processes 20% Number of inspections 20 10 30
Training employees 25% Number of material moves 30 10 50
Designing tooling 20% Engineering hours 10 50 10
Budgeted direct labor cost was $100,000, and budgeted direct material cost was $280,000.
10. What is the cost assigned to the creating BOMs activity?
A. $15,000 C. $87,500
14. If the company uses activity-based costing, how much overhead cost should be allocable to
B. $62,500 D. $250,000
Job 101?
A. $1,300 C. $5,000
11. What is the cost assigned to the improving processes activity?
B. $2,000 D. $5,600
A. $50,000 C. $102,000
B. $87,500 D. $250,000
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15. If the company uses activity-based costing, compute the cost of each unit of Job 102. 18. How much overhead cost will be assigned to product B using engineering hours?
A. $340 C. $440 A. $50,000 C. $400,500
B. $392 D. $520 B. $60,000 D. $1,000,000

16. The company prices its products at 140% of cost. If the company uses activity-based costing, 19. How much overhead cost will be assigned to product A using process A?
the price of each unit of Job 103 would be A. $120,000 C. $1,200,000
A. $98 C. $116 B. $960,000 D. $2,400,000
B. $100 D. $140
20. How much overhead cost will be assigned to product B using process B?
Questions 17 thru 22 are based on the following information A. $120,000 C. $960,000
Special Products recently installed an activity-based relational data base. Using the information B. $150,000 D. $1,200,000
contained in the activity relational table, the following pool rates were computed:
$200 per purchase order 21. What is the unit cost of Product A?
$12 per machine hour, process A A. $3.76 C. $5.30
$15 per machine hour, process B B. $4.71 D. $252.00
$40 per engineering hour
22. What is the unit cost of Product B?
Two products are produced by Special Products: A and B. Each product has an area in the plant A. $6.00 C. $9.40
that is dedicated to its production. The plant has two manufacturing processes, process A and B. $6.41 D. $252.00
process B. Other processes include engineering, product handling and procurement. The product
relational table for Special is as follows: Question 23 through 26 are based on the following information.
Activity Usage This information was presented as part of Question 3 on Part 3 of the June 1992 CMA
Activity Driver # Name Product A Product B examination, which covered activity-based costing.
1 Units 200,000 25,000 Alaire Corporation manufactures several different types of printed circuit boards: however, two of
2 Purchase orders 250 125 the boards account for the majority of the companys sales. The first of these boards, a television
3 Machine hours 80,000 10,000 (TV) circuit board, has been a standard in the industry for several years. The market for this type
4 Engineering hours 1,250 1,500 of board is competitive and therefore price-sensitive. Alaire plans to sell 65,000 of the TV boards
in 1993 at a price of $150 per unit. The second high-volume product, a persona computer (PC)
17. How much overhead cost will be assigned to product A using the number of purchase orders? circuit board, is a recent addition to Alaires product line. Because the PC board incorporates the
A. $25,000 C. $66,750 latest technology, it can be sold at a premium price, plans include the sale of 40,000 PC boards at
B. $50,000 D. $40,000,000 $300 per unit.

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Alaires management group is meeting to discuss strategies for 1993, and the current topic of $1,060,000
conversation is how to spend the sales and promotion dollars for next year. The sales manager Variable overhead:
believe that the market share for the TV board could be expanded by concentrating Alaires Machine setup $446,000 No. of setups 278,750 setups
promotional efforts in this area. In response to this suggestion, the production manager said, Why Hazardous waste disposal 48,000 Lbs. of waste 16,000 lbs.
dont you go after a bigger market for the PV board? The cost sheets that I get show a premium Quality control 560,000 No. of inspections 160,000 inspectns
price for the PC board, selling it should help overall profitability. General supplies 66,000 No. of boards 110,000 boards
Alaire uses a standard cost system, and the following data apply to the TV and PC boards. $1,120,000
TV Board PC Board Manufacturing:
Direct materials $80 $140 Machine insertion $1,200,000 No. of parts 3,000,000 parts
Direct labor 1.5 hours 4.0 hours Manual insertion 4,000,000 No. of parts 1,000,000 parts
Machine time 0.5 hours 1.5 hours Wave soldering 132,000 No. of boards 110,000 boards
Variable factory overhead is applied on the basis of direct labor hours. For 1993, variable factory is $5,332,000
budgeted at $1,120,000, and direct labor hours are estimated at 280,000. The hourly rates for
Required per unit TV Board PC Boards
machine time and direct labor are $10 and $14, respectively. Alaire applies a material handling
Parts 25 55
charge at 10% of materials cost, thus materials handling charge is not included in variable factory
Machine insertions 24 35
overhead. Total 1993 expenditures for materials are budgeted at $10,600,000.
Manual insertions 1 20
Ed Watch, Alaires controller, believes that, the management group proceeds with the discussion
Machine setups 2 3
about allocating sales and promotional dollars to individual products, they should consider the
Hazardous waste 0.02 lbs. 0.35 lbs.
activities involved in the production. As Welch explained to the group, Activity-based costing
Inspections 1 2
integrates the cost of all activities, known as cost drivers, into individual product costs rather than
including these costs in overhead pools. Welch has prepared the schedule shown below to help
23. On the basis of standard costs, the total contribution budgeted for the TV board is
the management group understand this concept.
A. $1,950,000 C. $2,340,000
Using this information, Welch explained, we can calculate an activity-based cost for each TV
B. $2,275,000 D. $2,470,000
board and each PC board and then compare it to the standard cost we have bee using. The only
cost that remains the same for both cost methods is the cost of direct materials. The cost drivers
24. On the basis of activity-based costs (ABC), the total contribution budgeted for the TV board is
will replace the direct labor, machine time, and overhead costs in the standard cost.
A. $1,594,000 C. $2,037,100
Annual Activity
B. $1,950,000 D. $2,557,100
Budgeted Cost Cost Driver for Cost Driver
Materials overhead:
25. On the basis of standard costs, the total contribution budgeted for the PC board is
Procurement $400,000 No. of parts 4,000,000 parts
A. $2,360,000 C. $2,960,000
Production scheduling 220,000 No. of boards 110,000 boards
B. $2,920,000 D. $3,000,000
Packaging & shipping 440,000 No. of boards 110,000 boards

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26. On the basis of activity-based costs, the total contribution budgeted for the PC board is 29. .The predetermined overhead rate (i.e., activity rate) for Activity 1 under the activity-based
A. P1,594,000 C. $2,360,000 costing system is closest to:
B. $1,950,000 D. $2,557,100 A. $13.17. C. $28.97.
B. $24.15. D. $83.66.
Questions 27 thru 30 are based on the following information.
Acton Company has two products: A and B. The annual production and sales of Product A is 800 30. The overhead cost per unit of Product A under the activity-based costing system is closest to:
units and of Product B is 500 units. The company has traditionally used direct labor-hours as the A. $11.24. C. $81.20.
basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labor hours B. $70.79. D. $86.97.
per unit and Product B requires 0.2 direct labor hours per unit. The total estimated overhead for
next period is $92,023. Answer Key
The company is considering switching to an activity-based costing system for the purpose of Theory Problems
computing unit product costs for external reports. The new activity-based costing system would 1. 21. 41. 1. 21.
have three overhead activity cost pools--Activity 1, Activity 2, and General Factory--with estimated 2. 22. 42. 2. 22.
overhead costs and expected activity as follows: 3. 23. 43. 3. 23.
4. 24. 44. 4. 24.
Estimated Expected Activity 5. 25. 45. 5. 25.
Activity Cost Pool Overhead Costs Product A Product B Total 6. 26. 46. 6. 26.
Activity 1 $14,487 500 600 1,100 7. 27. 47. 7. 27.
Activity 2 $64,800 2,500 500 3,000 8. 28. 48. 8. 28.
General Factory $12,736 240 100 340 9. 29. 49. 9. 29.
Total $92,023 10. 30. 50. 10. 30.
(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor 11. 31. 51. 11.
hours.) 12. 32. 52. 12.
13. 33. 53. 13.
27. The predetermined overhead rate under the traditional costing system is closest to: 14. 34. 54. 14.
A. $13.17. C. $37.46. 15. 35. 15.
B. $21.60. D. $270.66. 16. 36. 16.
17. 37. 17.
28. The overhead cost per unit of Product B under the traditional costing system is closest to: 18. 38. 18.
A. $2.63. C. $7.49.
19. 39. 19.
B. $4.32. D. $54.13.
20. 40. 20.

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