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Chapter 2 13

CHAPTER 2

COST TERMINOLOGY AND COST BEHAVIORS

QUESTIONS

1. Thetermcostisusedtorefertosomanydifferentconceptsthatanadjectivemust
beattachedtoidentifywhichparticulartypeofcostisbeingdiscussed.Forexample,
therearefixedcosts,variablecosts,periodcosts,productcosts,expiredcosts,and
opportunitycosts,tonamejustafew.

2. Acostobjectisanythingforwhichmanagementwantstocollectoraccumulate
costs.Beforeacostcanbespecifiedasdirectorindirect,thecostobjectmustbe
identified.Sincedirectcostsmustbeconvenientlyandeconomicallytraceabletothe
costobject,notknowingwhatthecostobjectinquestioniswouldmakeitimpossible
to identify direct costs. For example, if multiple products are made in the same
productionarea,thesalaryoftheareasmanagerwouldbedirecttotheproduction
areabutindirecttothedifferentproducts.Indirectcostsmustbeallocatedinsome
rationalandsystematicmannertothecostobject.

3. Theassumedrangeofactivitythatreflectsthecompanysnormaloperatingrange
is referred to as the relevant range. Outside the relevant range, costs may be
curvilinearbecauseofpurchasediscounts,improvedworkerskillandproductivity,
workercrowding,lossinemployeeefficiencyduringovertimehours,etc.Althougha
curvilineargraphismoreindicativeofreality,itisnotaseasytouseinplanningor
controllingcosts.Accordingly,accountantschoosetherangeinwhichthesefixedand
variable costs are assumed to behave as they are defined (linear) and, as such,
representanapproximationofreality.

4. Itisnotnecessaryforacausalrelationshiptoexistbetweenthecostpredictorand
thecost.Allthatisrequiredisthatthereisastrongcorrelationbetweenmovementin
the predictor and the cost. Alternatively, a cost driver is an activity that actually
causescoststobeincurred.

Thedistinctionbetweencostdriversandpredictorsisimportantbecauseitrelatesto
oneoftheobjectivesofmanagers:tocontrolcosts.Byfocusingcostcontrolefforts
on cost drivers, managers can exert control over costs. Exerting control over
predictorsthatarenotcostdriverswillhavenocostcontroleffect.

5. A product cost is one that is associated with inventory. In a manufacturing


company,productcostswouldincludedirectmaterial,directlabor,andoverhead.Ina
merchandisingcompany,productcostsarethecostsofpurchasinginventoryandthe
relatedfreightincosts.Inaservicecompany,productcostsarethosecoststhatare
incurredtogeneratetheservicesprovidedsuchassupplies,servicelabor,andservice
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14 Chapter 2

relatedoverheadcosts.

Inallthreetypesoforganizations,aperiodcostisanycostthatisnotaproductcost.
Thesecostsarenoninventoriableandareincurredinthenonfactoryornonproduction
areas of a manufacturing company or in the nonsales or nonservice areas,
respectively,ofaretailerorservicecompany.Ingeneral,thesecostsareincurredfor
sellingandadministrativeactivities.Manyperiodcostsareexpensedwhenincurred,
althoughsomemaybecapitalizedasprepaidexpensesorothernonfactoryassets.

6. Conversion costs are all production costs other than direct material costs; thus,
conversion costs include the costs of direct labor and manufacturing overhead. These
items are called conversion costs because they are needed to convert direct material
into a salable product.

7. Factory overhead has been growing most rapidly because of the costs of
technology.Thiscostcategoryincludesdepreciationoffactoryandplantequipment,
machinery maintenance cost, repair cost, some training costs, utilities expense to
operatethemachinery,andmanycostsrelatedtoqualitycontrol.

8. The only difference between the two systems is in their treatment of overhead.
Under an actual cost system, actual overhead is added to production. Because actual
overhead cannot be determined until the period ends, the overhead allocation occurs
and product cost can be determined only at period-end. Under a normal cost system, a
predetermined overhead rate is calculated before a period begins and is then used to
apply overhead to products as production occurs.
Themajoradvantageofusinganormalcostsystemisthatitallowsaproductscost
tobedetermined(estimated)atthetimeofproduction.Anothermajoradvantageis
thatanormalcostsystemprovidesaproductcostthatisstableacrossfluctuating
levelsofproductionandsales.

9. Thecostofgoodsmanufacturedisthetotalproductioncostofthegoodsthatwere
completed and transferred to Finished Goods Inventory during the period. This
amountissimilartothecostofnetpurchasesinthecostofgoodssoldschedulefora
retailer.SinceCGMisusedincomputingcostofgoodssold,itappearsontheincome
statement.

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Chapter 2 15

EXERCISES

10. a. Direct
b. Direct
c. Direct
d. Indirect
e. Direct
f. Direct
g. Indirect
h. Direct
i. Direct

11. COSTOBJECT
Notebook Plant
Touchpadandbuttons Direct Direct
Glue Indirect Direct
Networkconnector Direct Direct
Battery Direct Direct
Papertowelsusedbylineemployees Indirect Direct
ACadapter Direct Direct
CDdrive Direct Direct
Motherboard Direct Direct
Screws Indirect Direct
Oilforproductionmachinery Indirect Direct

12. COSTOBJECT
Kennedy TaxServices Firm
a. FourhoursofPerkinsstime Direct Unrelated Direct
b. Sixhoursofassistantstime Direct Direct Direct
c. ThreehoursofMorrisstime Indirect Indirect Direct
d. EighthoursofCPEforTompkin Indirect Direct Direct
e. Onehouratlunch Unrelated Unrelated Unrelated
f. TwohoursofPerkinsstime Direct Unrelated Direct
g. OnehalfhourofTompkinstime Direct Direct Direct
h. Janitorialwages Indirect Indirect Direct
i. SevenhoursofTompkinstime Direct Direct Direct

13.a. Cardboard, $0.40; cloth, $1; plastic, $0.50; depreciation, $0.60; superviors
salaries,$1.60;andutilities,$0.30;totalcost,$4.40.

.b Cardboard, variable; cloth, variable; plastic, variable; depreciation, fixed;


supervisorssalaries,fixed;andutilities,mixed.

.c If the company produces 10,000 caps this month, the total cost per unit will
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16 Chapter 2

increase. Thevariable costs(cardboard,cloth, plastic) willremainconstant per


unit.Thetotalcostfordepreciationandsupervisorssalarieswillremainfixed,
and,thus,willresultinahighercostperunit.Theutilitycostwillgodownintotal
but,becauseitismixed,itisimpossible(withoutotherinformation)toestimateits
total or perunit cost. Without knowing the cost formula for utility costs, it is
impossibletodeterminethetotalcostofmaking10,000caps.

.14 a.andb.
PerUnit PerSet
Cardboardboxes($1,0002,000) $0.50 $0.50
Mallets($12,0004,000) 3.00 6.00
Croquetballs($9,00012,000) 0.75 4.50
Wirehoops($3,60024,000) 0.15 1.80
Productionworkerwages($8,4002,000) ? 4.20
Supervisorssalary($2,6002,000) ? 1.30
Buildingandequipmentrental($2,8002,000) ? 1.40
Utilities($1,3002,000) ? 0.65
Total $20.35

c.EstimatedcostpersetinMarchis
Cardboardboxes($1,0002,000) $0.50
Mallets($12,0004,000;$32) 6.00
Croquetballs($9,00012,000;$0.756) 4.50
Wirehoops($3,60024,000;$0.1512) 1.80
Productionworkerwages($8,4002,000) 4.20
Supervisorssalary($2,6002,500) 1.04
Buildingandequipmentrental($2,8002,500) 1.12
Utilities($1,4002,500) 0.56
Total $19.72

.15 a. Totalfixedcost $37,500


Totalvariablecost(15,000tickets$10) 150,000
Totalcost $187,500

b. Totalcost $187,500
Desiredprofitmargin(15,000tickets$8) 120,000
Totalsalesprice $307,500
Dividedbyassumednumberofticketssold 15,000
Sellingpriceperticket $20.50

c. Totalrevenue(5,000tickets$20.50) $102,500
Totalcost:
Fixed $37,500

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Chapter 2 17

Variable(5,000$10) 50,000 (87,500)


Netprofit $15,000

c. Theassumptionmadewasthat15,000ticketswouldbesold.Thefraternityshould
havebeeninformedthatthefixedcostperticketwouldvary,dependingonthe
number of tickets sold. By spreading the fixed cost over fewer tickets, the
fraternitywouldmakelessprofitasticketsalesdeclined.

e.Totalrevenue(20,000tickets$20.50) $410,000
Totalcost:
Fixed $37,500
Variable(20,000$10) 200,000
(237,500)
Netprofit $172,500

16.a.(1)200returns:
Totalcost=$2,000+($9200)=$3,800
Costperunit=$3,800200=$19.00
(2)500returns:
Totalcost=$2,000+($9500)=$6,500
Costperunit=$6,500500=$13.00
(3)800returns:
Totalcost=$2,000+($9800)=$9,200
Costperunit=$9,200800=$11.50

b. Thefixedcostperunitvariesinverselywithactivity.Therefore,astheactivity(tax
returnsprepared)increases,thefixedcostperunitdecreases.

c. $15,000200=$75;$75+$19=$94feetochargeperreturn
$94800=$75,200totalfees;$75,200$9,200=$66,000

17.a.(1) Number of clients contacted, number of new clients generated, number of


milestraveled(ifdriving),numberofnightsawayfromhome.
(2) Numberofsuppliesrequisitions,numberofhoursworked,numberofcopies
made
(3) Purchasepriceofcomputersanddepreciationmethodchosen(numberofhours
ofcomputerusage,numberofhoursworked,expectedyearsofservice)
(4) Number of hours worked, number of times maintenance crew visits the
accountingfirm,numberofmonthsinperiod(ifmaintenanceisastrictfixed
costpermonth)

b. Thedistinctionbetweenacostpredictorandacostdriveriswhethertheactivity
measure actually causesthecosttobeincurred.Acostpredictor ismerely an
activitythatchangeswithchangesinthecost.Acostdriver causes coststobe
incurred. Of the costs addressed in (a), cost drivers that could also be cost

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18 Chapter 2

predictorswouldbe(1)numberofmilestraveled,(2)numberoftimessuppliesare
requisitioned,(3)numberofhoursworked,and(4)numberoftimesmaintenance
visitedtheaccountingfirm.

18. a. Numberofpatientsprocessed
b. Numberofpatientsscheduled
c. Numberofsurgeriesscheduled
d. Numberofsurgeriesscheduled
e. Numberoftestsordered
f. Numberofpatientsgettingtests(ifalltestsareperformedinsamelabatthesame
time)ornumberoftestsordered(ifpatienthastobemovedtomultiplelabsorfor
multipletests)
g. Numberoflabtestsadministered
h. Numberofpatientsmoved
i. Numberofsurgeriesperformed
j. Numberofsurgeriesperformed
k. Numberofmedicationsadministered
l. Numberofpatientsmoved
m. Numberofpatientsdischarged(itispossiblethatnotallpatientsaredischarged)
n. Numberofinsurancecompaniestobebilled

19. a. V,PT(couldbemixed)
.b V,PD
.c F,PD
.d V,PT
.e F,PT
.f V,PT(couldbefixedifpapertowelrollsarereplacedatspecificintervals
regardlessofneed)
.g F,PD(couldbeproductifassistantsareassignedtoworkonspecificprojects)
.h V,PT(couldbefixed)
.i V,PT
.j V,PT
.k F,PT(wouldbefixedbecauseitwaschargedforthetruckloadratherthanforan
individualpieceoffurniture;maybeconsideredaperiodcostandnotattachedto
theindividualpiecesoffurniture)

.20 a.F,OH
b. V,DM
c. V,DM
d. V,OH(assumingcostisinsignificant)
e. V,DM
f. F,OH
g. V,DM
h. F,OH

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Chapter 2 19

i. F,OH
j. V,DM
k. V,DL
l. V,DM
m. V,DM
n. V,DM

21. a.$600,000$60,000=$540,000depreciablecost
$540,00010years=$54,000depreciationperyear
(480600)($54,000)=$43,200isexpiredcost(partofproductOH)

b.Costofgoodssold $43,200
Finishedgoodsinventory $10,800

22. a. Onemonthofinsurance($18,6006) $3,100


Bonustocorporatepresident 10,000
Utilitycostonheadquarters($20,0000.40) 8,000
Total $21,100

b. Fivemonthsofinsurance($18,6005/6) $15,500
Seminarfee 1,000
Total $16,500

c.Propertytaxes($15,0001/3) $5,000
Utilitycostonfactory($20,0000.60) 12,000
Total $17,000

d. Productcostsareassignedtoproductsmade;thus,thecostscannotbeclassifiedas
expired or unexpired because it is not known whether the associated products
madeduringMayweresold.Ifsold,thecostswouldbeexpired;ifunsold,the
costswouldbeunexpiredandbeaccumulatedintheFinishedGoodsaccount.

23.a. Mfg.
b. Mfg.,Mer.,Ser.
c. Mfg.,Mer.,Ser.
d. Mer.(althoughmanufacturersmightrefertoFinishedGoodsInventoryinthis
manner)
e. Mfg.,Mer.,Ser.
f. Mfg.
g. Ser.
h. Mfg.,Mer.
i. Mfg.,Ser.

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20 Chapter 2

24.a. high
b. low
c. low
d. high
e. high
f. high
g. moderate
h. high
i. high
j. moderateorlow

25. a. Rivetsandaluminum=$12,510+$1,683,000=$1,695,510
Thejanitorialsuppliesandthesealantareindirectmaterials.

b. Aluminumcuttersandwelders=$56,160+$156,000=$212,160
Thejanitorialwagesandfactorysupervisorssalariesareindirectlabor.
Thesalespeoplessalariesareperiodcosts.

26.a. Stainlesssteel,plastic,andwoodblocks=
$800,000+$5,600+$24,800=$830,400

b. $500,000(equipmentoperators)

c. $6,000indirectmaterial(equipmentoilandgrease)
$82,000+$272,000=$354,000indirectlabor(mechanicsandsupervisors)

27.Directmaterial:
Mulch $320
Landscapingrock 1,580
Plantsandpots 1,950
$3,850
Directlabor:
Trumblessalary($3,00020=$150perday;
$1502daystodesign) $300
Gardenerswages($3,84020=$192perday;
$1925daystocomplete) 960 $1,260
Overhead:
Allocateddepreciation($20020workdays) $10
Constructionpermit 95
Allocatedrent(1503,000=5%;$2,4000.05
=$120;$12030=$4perday2days) 8*
Allocatedutilitybills($1,8000.05=$90;
$9030=$3perday2days)
6* $119

*Note:Therentandutilitybillswereallocatedonlybecauseofthedesignersuseof
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Chapter 2 21

spaceinthecompanyoffices.Giventheimmaterial amountoftheseallocations,
CarolynGardensmaysimplywanttotreatthesecostsasperiodcostsratherthan
attemptingtotracethemtoindividualjobs.Thus,ananswerof$105foroverhead
wouldalsobereasonable.

28. a. 6,000totalhours5,000regularhours=1,000overtimehours

b. Directlabor:5,000hours$9perhour=$45,000
Overhead:$54,000$45,000=$9,000

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22 Chapter 2

c. Shiftpremiums:
Secondshiftpremium:10%$9=$0.90
Overtimepremium:75%$9=$6.75
Overheadcosts:
Secondshiftpremium:2,500hours$0.90=$2,250
Overtimepremium:1,000hours$6.75=$6,750

29. a. 32,000totalhours27,000regularhours=5,000overtimehours

b. Directlabor:32,000hours$12perhour=$384,000
Overhead:$435,600$384,000=$51,600

c. Shiftpremiums:
Secondshiftpremium:8%$12=$0.96
Thirdshiftpremium:12%$12=$1.44
Overtimepremium:50%$12=$6.00

Manufacturingoverheadcosts:
Secondshiftpremium:9,000hours$0.96=$8,640
Thirdshiftpremium:9,000hours$1.44=$12,960
Overtimepremium:5,000hours$6.00=$30,000

30. a. PropertytaxoverheadcostforFebruary=$48,00012=$4,000
PropertytaxOHcostforremainderof2013=$44,000
ActualFeb.OHcosts=$530,000$124,000$44,000+$81,000=$443,000

b. FebruaryOHcostperunit=$443,00050,000=$8.86
TotalproductcostinFebruary=$24.30+$10.95+$8.86=$44.11

c. Ifactualcostsareused,productcostswilldiffereachperiod.Forexample,January
utilitycostperunitwas($124,00050,000),or$2.48,comparedtoFebruarys
costperunitof($81,00050,000),or$1.62.However,anormalcostsystemuses
apredeterminedoverheadratethatprovidesasmoothingeffecttooverheadcost
variationsoveranannualperiod.

31.Directmaterialused $24,000
Directlabor 126,000
Overhead
42,000
Currentmanufacturingcosts $192,000
Lessincreaseinworkinprocessinventory
(23,000)
Costofgoodsmanufactured $169,000

SinceWorkinProcessInventoryincreasedby$23,000,currentmanufacturingcosts
musthavebeen$23,000morethancostofgoodsmanufactured.

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Chapter 2 23

32. a.BeginningWIPinventory $372,000


Rawmaterialused $612,000
Directlabor 748,000
Manufacturingoverhead
564,000 1,924,000
Totalcosttoaccountfor $2,296,000
EndingWIPinventory (436,000)
Costofgoodsmanufactured $1,860,000

Note:ThebeginningandendingbalancesofRawMaterialInventoryarenotused
becausenoinformationisgivenonrawmaterialpurchasesforthemonthbutthe
amountofRMusedisspecificallyprovided.

b.BeginningFGinventory $224,000
Costofgoodsmanufactured
1,860,000
Costofgoodsavailableforsale $2,084,000
EndingFGinventory
(196,000)
Costofgoodssold $1,888,000
33. a. IrresistibleArt
ScheduleofCostofGoodsManufactured
FortheMonthEndedJuly31,2013
BeginningWIPinventory $146,400
BeginningRMinventory $93,200
Rawmaterialpurchased
656,000
Rawmaterialavailable $749,200
EndingRMinventory
(69,600)
Rawmaterialused $679,600
Indirectmaterialused(plugged)
(175,600)
Directmaterialused(given) 504,000
Directlabor($788,0000.75) 591,000
Overhead:
Various(given) $600,000
Indirectmaterial(fromabove) 175,600
Indirectlabor($788,0000.25)
197,000 972,600
Totalcosttoaccountfor $2,214,000
EndingWIPinventory
(120,000)
Costofgoodsmanufactured $2,094,000

b. IrresistibleArt
ScheduleofCostofGoodsSold
FortheMonthEndedJuly31,2013
BeginningFGinventory $72,000

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24 Chapter 2

Costofgoodsmanufactured
2,094,000
Goodsavailableforsale $2,166,000
EndingFGinventory
(104,800)
Costofgoodssold $2,061,200

34. a. TargCo.
CostofGoodsSoldSchedule
FortheMonthEndedMarch31,2013
BeginningFGinventory(given) $125,000
Costofgoodsmanufactured
2,537,500
Costofgoodsavailableforsale $2,662,500
EndingFGinventory(given)
(18,400)
Costofgoodssold(given) $2,644,100

b. TargCo.
CostofGoodsManufacturedSchedule
FortheMonthEndedMarch31,2013
BeginningWIPinventory(given) $90,000
Directmaterial:
BeginningDMinventory(given) $30,000
Directmaterialpurchased
1,182,000
Directmaterialavailable $1,212,000
EndingDMinventory(given)
(42,000)
Directmaterialused 1,170,000
Directlabor 400,000
Overhead
900,000
Totalcosttoaccountfor $2,560,000*
EndingWIPinventory($90,0000.25)
(22,500)
Costofgoodsmanufactured[from(a)] $2,537,500

*Totalcosttoaccountfor=Beg.WIP+DMused+DL+OH
$2,560,000=$90,000+$1,170,000+DL+OH
DL+OH=$2,560,000$90,000$1,170,000
DL+OH=$1,300,000
OH=225%ofDL=2.25DL
DL+2.25DL=$1,300,000
3.25DL=$1,300,000
DL=$400,000
OH=$400,0002.25=$900,000

c. Primecost=DM+DL
=$1,170,000+$400,000
=$1,570,000

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Chapter 2 25

d. Conversioncost=DL+OH
=$400,000+$900,000
=$1,300,000

35.a.WorkinProcessInventory 5,000
SuppliesInventory 5,000
Torecordsuppliesusageforauditengagements

TravelExpense 8,000
Cash 8,000
Torecordtravelexpensesforpartner

FixedOverheadControl 6,500
AccumulatedDepreciationLaptops 6,500
Torecordlaptopdepreciation

DepreciationExpense 52,500
FixedOverheadControl 97,500
AccumulatedDepreciationBuilding 150,000
TorecorddepreciationonNYCbuilding

WorkinProcessInventory 200,000
SalariesPayable 200,000
Toaccruepartnersalaries

WorkinProcessInventory 257,900
SalariesPayable 257,900
Toaccrueauditsalaries

WorkinProcessInventory 19,400
Cash 19,400
Torecordauditrelatedtravelcosts

InsuranceExpense 6,055
FixedOverheadControl 11,245
PrepaidInsuranceandTaxes 17,300
Torecordexpirationofprepaidinsurance
andpropertytaxesondowntownbuilding

VariableOverheadControl 3,400
WagesPayable 3,400
Toaccruesecretarialwages

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26 Chapter 2

SalariesPayable 457,900
WagesPayable 3,400
Cash 461,300
Topayaccruedsalariesandwages

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Chapter 2 27

b. CostofServicesRendered:
Suppliesused $5,000
Labor: Partnersalaries $200,000
Auditsalaries 257,900 457,900

Overhead:Laptopdepreciation $6,500
Depreciationonbuilding 97,500
Travel 19,400
Insuranceandtaxes 11,245
Indirectlabor 3,400 138,045
Totalcostofservicesrendered $600,945

36. Directlabor($8,100+$3,140) $11,240


Overhead:
Supplies($2,400$1,200) $1,200
Utilities($2,0000.90) 1,800
Officesalaries($1,9000.20) 380
Depreciation 3,700
Buildingrental($3,1000.80) 2,480

9,560
Costofservicesrendered $20,800

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28 Chapter 2

PROBLEMS
37. Typeof Variable Fixed Direct Period Product
Indirect
Cost
Paint X X X
Spirits X X X
Brushes X X X
Overalls X X X
Ad X X
Assistant X X X
Oper.Costs* X X X
Map X X X
Tolls X X X
Phone X X X

*Somevariablecostswouldbedirectifmilestoandfromparticularjobsarerecorded.

38. a.At80,000boxespermonth:
Materialandlaborcosts($79,000500) $158.00
Overhead($408,00080,000) 5.10
Totalcostperbox $163.10

b.At120,000boxespermonth:
Materialandlaborcosts($79,000500) $158.00
Overhead($408,000120,000) 3.40
Totalcostperbox $161.40

c. Materialandlabor(excludinglabordesign) $118.00
Overhead 3.40
Total $121.40

Costat80,000boxes $163.10
Costat120,000boxes(excludinglabordesign) (121.40)
Maximumlabordesigncosts $41.70

d.At80,000boxes:
Sales($19580,000boxes) $15,600,000
Costofsales($163.1080,000boxes)
(13,048,000)
Grossmargin $2,552,000

Desiredgrossmargin $2,552,000
Costofsales($161.40120,000boxes)
19,368,000
Salesneeded $21,920,000
$21,920,000120,000boxes=$182.67salespriceperbox

e. No,thevariablecostsperboxareconstantandthefixedcostsremainthesamein
totalatanylevelofproduction.
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Chapter 2 29

39. a.At150,000mealspermonth:
Materialandlaborcosts($9,3202,000) $4.66
Overhead($1,200,000150,000)
8.00
Totalcostpermeal $12.66

b. At300,000mealspermonth:
Materialandlaborcosts($9,3202,000) $4.66
Overhead($1,200,000300,000)
4.00
Totalcostpermeal $8.66

c.Materialandlabor(excludingmeat)($5,7202,000) $2.86
Overheadat300,000meals 4.00
Totalcostwithoutmeat $6.86
Costat150,000meals $12.66
Costat300,000meals(excludingmeat)
(6.86)
Maximummeatcostpermeal $5.80
Currentmeatcost($3,6002,000)
(1.80)
Potentialincreaseinmeatcost $4.00

d.$21.922=$10.96maximumcostpermeal
Maximummealcost $10.96
Currentcostsformaterialandlabor
(4.66)
Costperunitforoverhead $6.30

OverheadCostperunit=Totalmeals
$1,200,000$6.30=190,476or192,000ifmealsmustbeproducedin2,000unit
batches

e. The firm would be less profitable if the manager decided to produce 192,000
dinnersbutcouldsellonlythesame150,000thecompanyiscurrentlyselling.The
managermightacceptretainingthebusinesstoboosthisreputationasadeal
makersoastoobtainanotherpositionbeforethefinancialresultswerereported.

Currentprofitability:
Sales(150,000$25.32) $3,798,000
Variablecostofmeals(150,000$4.66) (699,000)
Fixedoverhead
(1,200,000)
Profitability $1,899,000

40. a.printinginvitations:stepfixed
preparingthetheater:stepfixed
postage:variable
buildingstagesets:fixed

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30 Chapter 2

printingprograms:fixed
security:fixed
script:fixed

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accessible website, in whole or in part.
Chapter 2 31

b. Membersattending=3000.60=180members
Attendanceestimate=180+[(901)+(902)]=450people
Fixedandstepfixedcosts=$360+$900+$1,800+$350+{3[$110+(5
$30)]}+$2,000=$6,190
Variablecost=$0.60450=$270
Totalcost=$6,190+$270=$6,460

c. $6,460450=$14.36(rounded)

d. Memberattendance=3000.90=270
Attendanceestimate=270+(2702)=810people
Fixedandstepfixedcosts=$450+$1,200+$1,800+$350+{3[$110+(5
$30)]}+$2,000=$6,580
Variablecost=$0.60810=$486
Totalcost=$6,580+$486=$7,066
Costperperson=$7,066810=$8.72(rounded)

Thereductioninperpersoncostiscausedbythefactthat,eventhoughsomeof
thestepfixedcostsincrease,thetotalfixedcostsarespreadovermoreattendees.

41. 1. C
2. H
3. D
4. L
5. E
6. G
7. A
8. F
9. J
(AICPA
adapted)

42. a. Determining the cost of a product merely involves tracing direct costs to
productionandfindingsomesystematicmethodofallocatingindirectproduction
costs to products. Controlling these costs involves completely different issues.
Controlofproductioncostsrequiresafocusonboththeproductcostsandthe
relatedcostdrivers.Suchcostscanbecontrolledonlybycontrollingtheactivity
levelsofthemainproductioncostdrivers.

b. The advancement oftechnology does make costs more difficult to control. As


technology has become more pervasive in manufacturing, the indirect
manufacturingcostshavegrownrelativetoproductionvolume.Hence,controlling
productionvolumehaslittletodowiththecontrolofmoreandmoreproduction
costs.Further,withthegrowthintheindirectcosts(suchasautomatedtechnology

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32 Chapter 2

depreciation),itismoredifficulttotraceproductioncoststospecificproducts.
This difficulty adds to the complexity of cost control because the relationship
betweenproductionvolumeandspecificproductsandtheirproductcostsisless
obvious.

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Chapter 2 33

c. Productionvolumeisnolongerassignificantacostdriverasitwastwodecades
ago.Thegrowthinbothfixedcostsandindirectcostssuggeststhatproduction
volumecannotbeusedasaneffectivecontrolforasubstantialsetofproduction
relatedcosts.However,productionvolumemaystillbeavalidpredictorbecauseit
maybereasonablywellcorrelatedwiththeactualcostdriversoftheseindirect
costsanditisstillthemostsignificantcostdriverfordirectproductioncosts.

43. a. Toremaincompetitiveintheglobalmarketplace,businessesmustcontrolcosts.
Provision of health care is creating a crisis for American businesses. In many
cases,healthcarecostsaretwiceashighforU.S.industriesasfortheirforeign
competitors.Thereisnothingunethicalaboutbusinessesbeingconcernedabout
thesecostsandseekingwaystocontrolthem.However,beforecuttingcoverage,
businesses have an ethical obligation to identify alternatives. For example,
emergingalternativesincludemanagedhealthcare,sharinginsurancepremiums
withemployees,andformingallianceswithotherbusinessestodirectlycontract
forhealthcareservices.Businessesshouldbecarefultogatheremployeeinputon
solutions before making any decisions that will adversely affect healthcare
coverage.

b. Therearenocorrectorincorrectanswerstothisquestion.Itisexpectedthateach
studentwillhavearelativelyuniquerankingofthealternatives.Thissubpartis
intended to demonstrate to the students how difficult it is to cut healthcare
insurance coverage because each worker has different needs and different
priorities.

c. Bybringingsomehealthcareservicesinhouse,afirmcanreplaceaportionofthe
variablecosts(peremployee)withfixedcosts.Acompanymaybeabletoachieve
similar benefits by directly contracting with healthcare service providers on a
(partly) fixedfee basis. Likewise, companies can implement health awareness
campaignsandprovidefitnessfacilitiesthatwillgeneratelongtermhealthbenefits
andlowerhealthcarecosts.Suchapproacheswillresultinanincreaseinfixed
costsandlowervariablecosts.

44.a.(1)WorkinProcessInventory 800,000
RawMaterialInventory 800,000
Toissuedirectmaterialtoproduction

(2) WorkinProcessInventory 720,000


Cash(40,000$18) 720,000
Topaydirectlaborpayroll

(3) ManufacturingOverheadControl 232,500


WagesPayable(15,500$15) 232,500
Toaccrueindirectlaborcosts

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34 Chapter 2

(4) ManufacturingOverheadControl 102,100


AccumulatedDepreciation 102,100
Todepreciatefactoryassets

(5) ManufacturingOverheadControl 32,800


SalariesPayable 32,800
Toaccruesupervisorssalaries

(6) ManufacturingOverheadControl 25,400


SuppliesInventory 25,400
Toissueindirectmaterialto
production

(7) FinishedGoodsInventory 1,749,300


WorkinProcessInventory 1,749,300
TotransfercompletedworktoFG

b. BeginningbalanceofWIP $18,900
Directmaterial 800,000
Directlabor 720,000
ManufacturingoverheadforJanuary(plug)
270,000
Costtoaccountfor $1,808,900
Goodscompleted
(1,749,300)
EndingbalanceofWIP $59,600

45.a. Directlaborislaborthatcanbespecificallyidentifiedwith,orphysicallytracedto,
a cost object or finished product in an economically feasible manner (such as
machineoperatorlaborinaproductionenvironment).Indirectlaborisallfactory
laborthatisnotclassifiedasdirectlabor.

b. Certainnonproductivetimemaybeanormalandunavoidablepartoftotal
labor time. In such cases, a pro rata share of nonproductive time should be
classifiedasdirectlabortime.Inmanycases,nonproductivetimeisclassifiedas
indirectlaborbecauseitcannotbeidentifiedwithacostobject.Forexample,the
amount of downtime usually cannot be identified with a specific cause or
particularcostobject;itmayresultfromapartsshortageorabrokenmachine.
Whenthereisashortageofworkandemployeeswouldthereforebeidle,thistime
canbeusedfortraining.

c. Direct labor: The items classified as direct labor can usually be


specifically identified withaquantityoflabor.Furthermore,other directcosts,
suchaspayrolltaxes,areincurredbytheorganizationbecauseofitsuseoflabor.
Manufacturingoverhead:Theitemsclassifiedasmanufacturingoverheadusually
cannotbespecificallyidentifiedwithdirectlaborquantities.
Directlaborormanufacturingoverhead: Somecostitems canbeclassifiedas

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Chapter 2 35

eitherdirectlaborormanufacturingoverhead,dependingonthesizeofthecost
object. For example, for very large projects, employee time can be easily
associated with the projects (suchas the time ofspecific managers, engineers,
draftspersons,janitors,andmaterialhandlers).Therefore,allcostsassociatedwith
theseemployeescanbeclassifiedasdirectlaborcosts.Forsmallercostobjects,
suchasavarietyofproductsorsubassemblies,costsaremoredifficulttoidentify
withthecostobjectsandthereforeareclassifiedasmanufacturingoverhead.

d. The quantity of labor hours that should be included as direct labor or


manufacturing overhead reflects a measure of activity. The activity that was
performedwaseitherdirectlyrelatedtotheproductorindirectlyrelated(ornot
easilytraceable)totheproduct.Thedollaramountassignedmeasuresthecostof
the activity. Wages and salaries are not necessarily directly tied to production
activity.Forexample,assumeadirectlaboremployeemakes$10perhourand
timeandahalfforovertime.Thisemployeesactivityisnodifferentduringthe
overtimehoursonlythewageratediffers.Thus,measurementofactivityand
measurementofcostmustbeseparated.
(CMA
adapted)

46.a. Overheadcostsaretheeasiesttoassigntootherclassificationssincethosecosts
arenotdirectlyrelatedtotheproductionofthegoods.

b. Eachstudentwillhaveadifferentanswer,butthefollowingshouldbe
considered: the reason for the banks loangranting criteria; the effect on the
companyssuppliers,employees,andcustomersshouldthisloannotbegranted;
theabilitytomanipulatefinancialincome;andtheinappropriatetoneatthetop
thatthepresidentissuggesting.

c. Thememoshouldcontaininformationastothenatureofcostsandthefactthatthe
cost of a product can, in many instances, have many different meanings. It
shouldindicatetheneedfortheloan,theabilitytoprovidecollateral(ifany),and
informationastopayback.Thememoshouldindicatethatthebottomlineisin
excessofthebankscriteriaandhowthisfactcouldinfluencetheabilitytorepay.
Cashflowfromproductsalesshouldalsobediscussedbecause,withoutcashflow,
incomecannotpaybackloanamounts.

47.a. IfGPrateis35percentofsales,thenCGSis65percentofsales.
CGS=0.65$1,431,000=$930,150

b.Directmaterialused $447,000
Directlabor 322,500
Overhead:
Indirectlabor $93,000
Factoryinsurance 3,000
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36 Chapter 2

Factoryutilities 21,450
Factorydepreciation 32,550
Factoryrent 126,000 276,000
Totalcoststoaccountfor $1,045,500
EndingWIPinventory (15,750)
Costofgoodsmanufactured $1,029,750

c. EndingFGinventory=BeginningFGinventory+CGMCGS
=$0+$1,029,750$930,150
=$99,600

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Chapter 2 37

d. Grossprofit=0.35$1,431,000=$500,850
S&Aexpenses=GrossprofitNetincome
=$500,850$125,000
=$375,850

e. RawMaterialInventory 555,000
AccountsPayable 555,000
Topurchasedirectmaterialonaccount

WorkinProcessInventory 447,000
RawMaterialInventory 447,000
Toissuedirectmaterialtoproduction

WorkinProcessInventory 322,500
WagesPayable 322,500
Toaccruedirectlaborpayroll

ManufacturingOverheadControl 93,000
WagesPayable 93,000
Toaccrueindirectpayroll

ManufacturingOverheadControl 3,000
PrepaidInsurance 3,000
Torecordexpirationofprepaidinsurance
onfactory

ManufacturingOverheadControl 21,450
Cash 21,450
Topayfactoryutilities

ManufacturingOverheadControl 32,550
AccumulatedDepreciation 32,550
Torecorddepreciationonfactoryequipment

ManufacturingOverheadControl 126,000
Cash 126,000
Topayfactoryrent

WorkinProcessInventory 276,000
ManufacturingOverheadControl 276,000
ToassignactualoverheadtoWIP[see(b)]

FinishedGoodsInventory 1,029,750
WorkinProcessInventory 1,029,750
TotransfercompletedgoodstoFG[see(b)]
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38 Chapter 2

S&AExpenses 375,850
AccountsPayable(orCash) 375,850
TorecordS&Aexpense[see(c)]

CostofGoodsSold 930,150
FinishedGoodsInventory 930,150
Torecordcostofgoodssold[see(a)]

AccountsReceivable 1,431,000
Sales 1,431,000
Torecordsalesonaccount

48.a. Numberofunitssold=648,000$24=27,000
Numberofunitscompleted=UnitsinFGinventory+Unitssold
=3,000+27,000
=30,000

b. Directmaterialused $186,000
Directlabor 134,000
Overhead:
Factoryrent $3,600
Factoryutilities 16,200
Factorydepreciation 15,800
Supervisorsalary 6,400 42,000
Totalcoststoaccountfor $362,000
EndingWIPinventory
(35,000)
Costofgoodsmanufactured $327,000

c. $327,00030,000=$10.90perunit

d. RawMaterialInventory 248,000
AccountsPayable 248,000
Topurchasedirectmaterialonaccount

WorkinProcessInventory 186,000
RawMaterialInventory 186,000
Toissuedirectmaterialtoproduction

WorkinProcessInventory 134,000
WagesPayable 134,000
Toaccruedirectlaborpayroll

ManufacturingOverheadControl 3,600

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accessible website, in whole or in part.
Chapter 2 39

Cash 3,600
Topayfactoryrent

ManufacturingOverheadControl 16,200
UtilitiesPayable 16,200
Toaccruefactoryutilities

ManufacturingOverheadControl 15,800
AccumulatedDepreciation 15,800
Torecorddepreciationonfactoryequipment

ManufacturingOverheadControl 6,400
Cash 6,400
Topaysupervisorssalary

WorkinProcessInventory 42,000
ManufacturingOverheadControl 42,000
ToassignactualoverheadtoWIP[see(b)]

FinishedGoodsInventory 327,000
WorkinProcessInventory 327,000
TotransfercompletedgoodstoFG[see(b)]

CostofGoodsSold 294,300
FinishedGoodsInventory 294,300
Torecordcostofgoodssold($10.9027,000)

AccountsReceivable 648,000
Sales 648,000
Torecordsalesonaccount($2427,000)

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40 Chapter 2

49.
Case 1 Case 2 Case 3
Sales $9,300 $19,700g $112,000
Direct material used 1,200 6,100h 18,200
Direct labor 2,500a 4,900 32,100m
Prime cost 3,700 11,000i 50,300n
Conversion cost 4,800 8,200 49,300
Manufacturing overhead 2,300b 3,300j 17,200
Cost of goods manufactured 6,200 14,000 68,900o
Beginning WIP inventory 500 900 5,600
Ending WIP inventory 300c 1,200 4,200
Beginning FG inventory 800d 1,900 7,600
Ending FG inventory 1,200 3,700k 4,300p
Cost of goods sold 5,800e 12,200 72,200
Gross profit 3,500 7,500l 39,800q
Operating expenses 1,300f 3,500 18,000
Net income 2,200 4,000 21,800r
a
Primecost=DM+DL
$3,700=$1,200+X;X=$2,500
b
Conversioncost=DL+OH
$4,800=$2,500+X;X=$2,300
c
Beg.WIP+DM+DL+OHCGM=End.WIP
$500+$1,200+$2,500+$2,300$6,200=X;X=$300
e
SalesGrossprofit=CGS
$9,300$3,500=X;X=$5,800
d
Beg.FG+CGMEnd.FG=CGS
X+$6,200$1,200=$5,800;X=$800
f
GrossprofitOperatingexpenses=NI
$3,500X=$2,200;X=$1,300
g
SalesCGSOperatingexpenses=NI
X$12,200$3,500=$4,000;X=$19,700

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Chapter 2 41

h
CGM=Beg.WIP+DM+DL+OHEnd.WIP
$14,000=$900+X+$4,900+$3,300$1,200;X=$6,100

i
Primecost=DM+DL
X=$6,100+$4,900;X=$11,000
j
Conversioncost=DL+OH
$8,200=$4,900+X;X=$3,300
k
Beg.FG+CGMEnd.FG=CGS
$1,900+$14,000X=$12,200;X=$3,700
l
SalesCGS=Grossprofit
$19,700$12,200=X;X=$7,500
m
Conversioncost=DL+OH
$49,300=X+$17,200;X=$32,100
n
Primecost=DM+DL
X=$32,100+$18,200;X=$50,300
o
CGM=Beg.WIP+DM+DL+OHEnd.WIP
X=$5,600+$32,100+$18,200+$17,200$4,200;X=$68,900
p
Beg.FG+CGMEnd.FG=CGS
$7,600+$68,900X=$72,200;X=$4,300
q
SalesCGS=Grossprofit
$112,000$72,200=X;X=$39,800
r
GrossprofitOperatingexpenses=NI
$39,800$18,000=X;X=$21,800

50.a. Under GAAP, product cost consists of all amounts that are necessary to
manufacture a product. Although direct material and direct labor are clearly
traceabletoaproductandthusshouldbeconsideredpartofproductcost,aproduct
could also not be produced without the costs of overhead. In amanufacturing
plant, employees need to have some level of supervision and perform some
cleanuptasks.Glue,screws,andnailsarecommonlyusedtosecurepartstogether.
Equipment and utilities must be used. Thus, indirect labor, indirect material,
depreciation,andelectricityarerequiredtomanufactureaproductandshouldbe
partofthatproductscost.

b. Itdoesnotseemreasonabletoallocatethedepreciationoverheadcostofthenew
equipment to the dog carriers because that equipment is not required for the
productionofthecarriers.Forthisreason,overheadcostsshouldbeseparatedinto
differentallocationpoolsandallocatedtothetwoproductgroupsbasedonthe

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42 Chapter 2

costdriversassociatedwitheachallocationpool.Thisconceptisexplainedinmore
detailinChapter4.

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accessible website, in whole or in part.
Chapter 2 43

c. Anormalcostsystemusesapredeterminedchargeforoverheadratherthanusing
theactualamountsthatareincurred.Oneprimarycomponentofoverheadisutility
cost. In Michigan, the utility cost for winter operations could be substantially
greaterthanduringthesummer.InHawaii,theclimateisconsistentyearround,
andthus,utilitycostsshouldbefairlyconstant.Becauseofthelargefluctuationsin
utilitycosts,aMichiganbusinessmightbemorelikelytowanttosmooththat
partofoverheadthroughouttheyearbyusingapredeterminedoverheadrate.

51.a.Beginninginventoryofdirectmaterial $12,300
Directmaterialpurchased 196,300

Materialsavailableforuse $208,600
Endinginventoryofdirectmaterial X
Directmaterialused $195,800

X=$208,600$195,800
X=$12,800

b.Directmaterialused $195,800
Directlabor 182,400
Factoryoverhead
205,700
Totalproductcosts $583,900

c. PetershamCompany
ScheduleofCostofGoodsManufactured
FortheMonthEndedAugust31,2013
BeginningWIPinventory $25,900
Directmaterialused 195,800
Directlabor 182,400
Overhead 205,700

Totalcoststoaccountfor $609,800
EndingWIPinventory (33,300)
Costofgoodsmanufactured $576,500

d. PetershamCompany
CostofGoodsSoldSchedule
FortheMonthEndedAugust31,2013
BeginningFGinventory $62,700
Costofgoodsmanufactured
576,500
Goodsavailableforsale $639,200
EndingFGinventory
(55,500)
Costofgoodssold $583,700

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44 Chapter 2

e.PetershamCompany
IncomeStatement
FortheMonthEndedAugust31,2013
Sales $985,000
Costofgoodssold
(583,700)
Grossprofit $401,300
Sellingandadministrativeexpenses
(171,200)
Incomebeforeincometaxes $230,100
Incometaxexpense($230,1000.40)
(92,040)
Netincome $138,060

52.a. $1,040,000$5,200=200unitssold

b. FlexEm
ScheduleofCostofGoodsManufactured
FortheMonthEndedJuly31,2013
BeginningWIPinventory $0
Directmaterialused $377,000
Directlabor 126,800
Overhead:
Indirectlabor $40,600
Insurance 6,000
Utilities 17,800
Depreciation 230,300 294,700
798,500
Totalmanufacturingcosts $798,500
EndingWIPinventory
(51,000)
Costofgoodsmanufactured $747,500

c. Unitscompleted=Unitssold+UnitsinendingFGinventory
=200+($97,500$3,250)
=200+30
=230unitscompleted

d. $747,500230units=$3,250

e. 200$3,250=$650,000

f. SalesCGS=Grossmargin
$1,040,000$650,000=$390,000

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Chapter 2 45

53.a.andb.
RawMaterialInventory
BB 72,000 (2)DMandIMissued
(1)Purch. 570,000 136,200
EB 505,800

WorkinProcessInventory
BB 108,000 CGM532,140
(2)DM 121,200
(2)IM 15,000
(3)DL 180,000
(3)IL 42,000
(5)Util. 28,140
(6)Depr. 48,000
(7)Rent 39,600
EB 49,800

FinishedGoodsInventory
BB 24,000 CGS502,740
EB 53,400

Totalproductcost=Costofgoodsmanufactured=$532,140

PeriodcostsforAugust(allonincomestatement):
Officesalariesexpense(4) $144,600
Utilitiesexpense(5) 12,060
Depreciationexpense(6) 12,000
Rentexpense(7) 26,400
Totalperiodcost $195,060

54.a. Costofgoodssoldforthefirst18daysofJune:$230,000(10.40)
=$138,000

Costofgoodssoldforthefirst18daysofJune:

BeginningFGinventory $29,000
Costofgoodsmanufactured
151,500b
Goodsavailableforsale $180,500a
EndingFGinventory
(42,500)
Costofgoodssold $138,000
a
CGA=$138,000+$42,500=$180,500
b
CGM=$180,500$29,000=$151,500

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46 Chapter 2

Costofgoodsmanufacturedforthefirst18daysofJune:

BeginningWIPinventory $48,000
Directmaterialused 76,000
Directlabor 44,000
Manufacturingoverhead 42,000
Totalcosttoaccountfor $210,000
EndingWIPinventory
(58,500)c
Costofgoodsmanufactured $151,500
cEndingWIPInventory=$210,000$151,500=$58,500

b. Theinsurancecompanywouldwanttosubstantiatethequantityand
costoftheinventory.Thecompanywouldrequirenonfinancialrecordsincluding
labor,material,andproduction.Theinsurancecompanymightalsorequiresome
verification of the market value (current value or replacement value) of the
inventory.Further,itmightrequirethecompanytosubstantiatethenumberofunits
intheWIPinventoryandtheaveragepercentageofcompletion.Themarketvalue
data could be obtained from industry publications and the unit data might be
obtainedfromproductionrecordsorinternalreceivingandshippingdocuments.

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