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PART A. (Activity analysis) The following activities take place in Usher’s Department Store. Upon
receipt, Usher’s discounts all products 25 percent from the manufacturer’s suggested retail price.
Only after the goods have been in stock for 90 days will additional discounts be given.

1. Attending trade shows to view new products

2. Reviewing supplier catalogs
3. Ordering merchandise
4. Waiting for shipments to be received
5. Inspecting goods for damage
6. Matching receiving reports and purchase orders
7. Placing discounted price tags on merchandise
8. Moving goods to retail area
9. Stocking shelves
10. Training salespersons in store merchandise
11. Checking out customers
12. Handing customer receipts
13. Wrapping gift items
14. Helping customers with return or exchanges

Required: Indicate which activities are value-added (VA), business-value-added (BVA), and
non-value-added (NVA).

PART B. (Activity analysis; MCE) Elaydo Inc. makes flavored water and performs the following tasks in
the beverage manufacturing process:

Receiving and transferring ingredients to storage 9.0
Storing ingredients 270.0
Transferring the ingredients from storage 4.5
Mixing and cooking the ingredients 4.5
Bottling the water 3.0
Transferring the bottles to await customer shipment 9.0

1. Calculate the total cycle time of this manufacturing process.
2. Calculate the manufacturing cycle efficiency of this process.

PART C. (Activity analysis; MCE) Log Cabins Unlimited constructs vacation houses in the North
Carolina mountains. The company has developed the following value chart:

Operations Average Number of Days

Receiving materials 2
Storing materials 10
Measuring and cutting materials 9
Handling materials 7
Setting up and moving scaffolding 6
Assembling materials 3

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Building fireplace 12
Pegging logs 8
Cutting and framing doors and windows 5
Sealing joints 4
Waiting for county inspectors 6
Inspecting property (county inspectors) 1

1. What are the value-added activities and their total time?
2. What are the non-value-added activities and their total time?
3. Calculate the manufacturing cycle efficiency of the process.

PART C. (Levels of costs) Th e following costs are incurred in a fast-food restaurant that relies on
computer-controlled equipment to prepare customers’ food. Classify each cost as unit level (U), batch
level (B), product/process level (P), or organizational level (O):

1. Maintenance of the restaurant building

2. Refrigeration of raw materials
3. Cardboard boxes for food order
4. Store manager’s salary
5. Electricity expense for the pizza oven
6. Wages of employees who clear and clean tables
7. Depreciation on equipment
8. Property taxes
9. Oil for the deep-fat fryer (changed every four hours)
10. French fries

PART E. (Levels of costs) DaSilva Co. has a casting machine that is used for three of the company’s
products. Each setup of the machine costs was $18,760 and the casting machine was set up in June
for six different production runs. The following information shows the units of output from each of
the setups.

Setup # Product #453 Product #529 Product #663

1 840
2 22,800
3 12,000
4 27,600
5 60
6 17,100

1. If total machine setup cost is allocated to all units of product, what is the setup cost per unit
and total setup cost for Products #453, 529, and 663 during June?
2. If machine setup cost is allocated to each type of product made, what is the setup cost per
unit of Products #453, 529, and 663 during June? (Round to the nearest cent.)

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Having attended a CIMA course on activity-based costing you decide to experiment by applying the
principles of ABC to the four products currently made and sold by your company. Details of the four
products and relevant information are given below for one period:

Product A B C D
Output in units 120 100 80 120
Cost per unit:
Direct Material 40 50 30 60
Direct Labor 28 21 14 21
Machine hours per unit 4 3 2 3

The four products are similar and are usually produced in production runs of 20 units and sold in batches
of 10 units. The production overhead is currently assigned by using a machine hour rate, and the total of
the production overhead for the period has been analyzed as follows:

Machine department cost (rent, business rates,

Depreciation and supervision) 10,430
Set-up costs 5,250
Stores receiving 3,600
Inspection/Quality Control 2,100
Materials handling and dispatch 4,620

You have ascertained that the cost drivers to be used are as listed below for overhead costs shown:

Cost Cost Driver

Set up costs Number of production runs
Stores receiving Requisitions raised
Inspection/Quality control Number of production runs
Material handling and dispatch Orders executed

The number of requisitions raised on the stores was 20 for each product and the number of orders
executed was 42, each order being for a batch of 10 of a product.

a. Calculate the total costs for each product if all overhead costs are absorbed on a machine hour
b. Calculate the total costs for each product, using activity-based costing.

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W is a manufacturing company that produces three products: X, Y and Z. Each uses the same resources,
but in different quantities as shown in the table of budgeted data below:

Product X Y Z
Budgeted production 1,500 2,500 4,000
Direct labor hours per unit 2 4 3
Machine hours per unit 3 2 3
Batch size 50 100 500
Machine setups per batch 2 3 1
Purchase orders per batch 4 4 6
Material movements per batch 10 5 4

W’s budgeted production overhead costs are P400,000 and current practice is to absorb these costs into
product costs using an absorption rate based on direct labor hours. As a result, the production overhead
cost attributed to each product unit is:

Product X P32 Product Y P64 Product Z P48

The management are considering changing to an activity based method of attributing overhead costs to
products and as a result have identified the following cost drivers and related cost pools:

Cost Pool PhP Cost Diver

Machine maintenance 100,000 machine hours
Machine setups 70,000 machine setups
Purchasing 90,000 purchase orders
Material handling 60,000 material movements

The remaining P80,000 of overhead costs are caused by a number of different factors and activities that
are mainly labor related and are to be attributed to products on the basis of labor hours.

Calculate the production overhead cost attributed to each product using an activity-based

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A healthcare company specializes in hip, knee and shoulder replacement operation, known as surgical
procedures. As well as providing these surgical procedures the company offers pre-operation and post-
operation in-patient care, in a fully equipped hospital, for those patients who will be undergoing surgical

Surgeons are paid a fixed fee for each surgical procedure they perform and an additional amount for any
follow-up consultations. Post procedure follow up consultations are only undertaken if there are any
complications in relation to the surgical procedure. There is no additional fee charged to patients for any
follow up consultations. All other staffs are paid annual salaries.

The company’s existing costing system uses a single overhead rate, based on revenue, to charge the costs
of support activities to the procedures. Concern has been raised about the inaccuracy of procedure costs
and the company’s accountant has initiated a project to implement an activity-based costing system.

The project team ahs collected the following data on each of the procedures.

Procedure Information Hip Knee Shoulder

Fee charged to patients per
procedure P8,000 P10,000 P6,000
Number of procedures per
annum 600 800 400
Average time per procedure 2.0 hours 1.2 hours 1.5 hours
Number of procedures per
theatre session 2 1 4
In-patient days per procedure 3 2 1
Surgeon’s fee per procedure P1,200 P 1,800 P1,500
% of procedures with
complications 8% 5% 10%
Surgeon’s fee per follow up
consultation P 300 P 300 P 300
Cost of medical supplies
per procedure P 400 P 200 P 300

The project team has obtained the following information about the support activities.

Activity Cost Driver Overhead Amount (P)

Theatre preparation Number of theatre
for each session preparations 864
Operating theatre usage Procedure time 1,449
Nursing and ancillary
services In-patient days 5,428
Administration Sales revenue 1,216
Other overheads Number of procedures 923

a. Calculate the profit per procedure for each of the three procedures, using the current basis for
charging costs of support.
b. Calculate the profit per procedure for each of the three procedures using activity-based costing.

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Problem 1. KY makes several products including Product W. KY is considering adopting an activity-

based approach for setting its budget. The company’s production activities, budgeted activity costs and
cost drivers are given below:

Cost Driver
Activity PhP Cost Driver
Set-up costs 200,000 No. of set-ups 800
Inspection/Quality Control 120,000 No. of quality tests 400
Stores Receiving 252,000 No. of purchase requisitions 1,800

Machines are reset after each batch. Quality tests are carried every second batch. The budgeted data for
Product W for next year are:

Direct materials P 2.50 per unit

Direct labor 0.03 hours per unit P 18 per hour
Batch size 150 units
Number of purchase requisitions 80
Budgeted production 15,000 units

Calculate, using activity-based costing the budgeted total production cost per unit for Product W.

Problem 2. Kikay company would like to institute an activity-based costing system to price products. The
company’s Purchasing Department incurs cost of P550,000 per year and has six employees. Purchasing
has determined the three major activities that occur during the year:

Activity Allocation Measure No. of People Total Cost

Issuing purchase orders No. of purchase orders 1 P 150,000
Reviewing receiving No. of receiving reports 2 175,000
Making phone calls No. of phone calls 3 225,000

During the year, 50,000 phone calls were made in the department; 15,000 purchase orders were issued;
and 10,000 shipments were received. Product A required 200 phone calls, 150 receiving reports, and 50
purchase orders. Product B required 350 phone calls, 400 receiving reports, and 100 purchase orders.

a. Determine the amount of purchasing department cost that should be assigned to each of these

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Physical Flow of Driver
Activities Traceable Costs
Open new accounts P 40,000 1,000 accounts
Process deposits 72,000 360,000 deposits
Process withdrawals 100,000 200,000 withdrawals
b. Determine purchasing department cost per unit if 1,500 units of Product A and 3,000 units of
Product B were manufactured during the year.

Problem 3. First Bank had the following activities, traceable costs, and physical flow of driver units:

Activities Downtown Uptown

new accounts 200 400
deposits 40,000 20,000
withdrawals 15,000 18,000

The above activities are used by downtown branch and uptown branch:

a. Compute the new account cost assigned to downtown branch.
b. Compute deposit processing cost assigned to uptown branch.
c. Compute the withdrawal processing cost assigned to downtown branch.

Problem 4. Vid-saver, Inc. has five activity cost pools and two products (a budget tape rewinder and a
deluxe tape rewinder). Information is presented below:


Activity Cost Pool Cost Driver Estimated Budget Deluxe
Ordering and Orders P120,000 600 400
Machine setup Setups 297,000 500 400
Machining Machine hours 1,500,000 150,000 100,000
Assembly Parts 1,200,000 1,200,000 800,000
inspection inspections 300,000 550 450


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Compute the overhead cost per unit for each product. Production is 700,000 units of Budget and
200,000 units of Deluxe.

Problem 5. Aerodec, Inc. manufactures and sells two types of wooden deck chairs: Deluxe and Tourist.
Annual sales in units, direct labor hours per unit, and total direct labor hours per year are provided below:

Deluxe deck chair: 2,000 units X 5DLHs per unit…………………….. 10,000

Tourist deck chair: 10,000 units X 4DLHs per unit…………………… 40,000
Total direct labor hours………………………………………………… 50,000

Cost for direct materials and direct labor for one unit of each product are given below:

Deluxe Tourist
Direct materials P 25 P 17
Direct labor (at P12 per DLH) 60 48

Manufacturing overhead costs total P800,000 each year. The breakdown of these costs among the
company’s six activity cost pools is given below. The activity measures are shown in parentheses.

Estimated Overhead Expected Activitiy

Activities and Activity Measures
Cost Deluxe Tourist Total
Labor-related (direct labor hours) P 80,000 10,000 40,000 50,000
Machine set-ups (no of set-ups) 150,000 3,000 2,000 5,000
Parts administration (no. of parts) 160,000 50 30 80
Production orders (no. of orders) 70,000 100 300 400
Material receipts (no. of receipts) 90,000 150 600 750
General factory (machine hours) 250,000 12,000 28,000 40,000
TOTAL P 800,000

a. Classify each of Aerodec’s activities as either a unit-level, batch-level, product-level, or facility-
level activity.
b. Assume that the company applies overhead cost to products on the basis of direct labor hours
i. Compute the predetermined overhead rate.
ii. Determine the unit product cost of each product, using the predetermined overhead rate
computed above.
c. Assume the company uses activity-based costing to compute overhead rates
i. Compute the activity rate for each of the six activities listed above.
ii. Using the rates developed in (c )(i) above, determine the amount of overhead cost that would
be assigned to a unit of each product.


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TRUE OR FALSE. Write T if the statement is true and F if otherwise.
1. A job order costing system measures costs of each processes using an inventory account for each.
2. The computations for costs to be transferred out of Work in Process Inventory differ if the production process involves
multiple departments rather than a single department.
3. Like a job order costing system, a process costing system is restricted to one Work in Process Inventory account.
4. Identical products are produced in a continuous flow production process.
5. In a job order costing system, costs are traced to a specific job order.
6. An advertising company would probably use a process costing system.
7. Companies that produce custom-made products usually use a process costing system.
8. Job order costing is used by companies that make unique or special-order products.
9. In a process costing system, product costs are traced to work cells.
10. A job order costing system is used by companies that manufacture large amounts of similar products.
11. A typical operations costing system for a manufacturer incorporates parts of both job order costing and process
12. The production process determines the product costing system needed.
13. A process costing system first assigns the costs to the products manufactured by the departments, and then traces the
costs of direct materials, direct labor, and overhead to departments.
14. A company using the periodic inventory system records cost of goods sold when products are sold.
15. The purchasing process begins with a request for indirect materials, whereas the manufacturing process begins with a
request for direct materials.
16. Costs for individual jobs are maintained on material cost cards when job order costing is in use.
17. Job order cost cards for incomplete jobs make up the ending balance of the Finished Goods Inventory account.
18. When a job has been completed, all of the costs assigned to that job are moved to the Cost of Goods Sold account.
19. In a job order costing system, when overhead costs are applied, they decrease the Work in Process Inventory account.
20. In a job order costing system, indirect labor costs incurred are debited to the Overhead account.
21. In a job order costing system, the transfer of overhead costs to the Work in Process Inventory account must take place
before product unit costs can be computed.
22. In a job order costing system, when indirect materials are used, the Overhead account is increased.
23. In a job order costing system, indirect labor costs are recorded by increasing the Payroll Payable account and
increasing the Overhead account.
24. In a job order costing system, when the goods are sold, the Cost of Goods Sold account is increased, and the Finished
Goods Inventory account is decreased for the selling price of the goods sold.
25. The ending balance in the Work in Process Inventory account equals the ending Overhead balance.
26. A zero balance in Work in Process Inventory at the start of the period means all previously completed products have
been shipped.
27. To prepare financial statements at the end of the accounting period, the actual overhead cost for the period and the
estimated overhead that was applied during the period must be reconciled in a job order costing system.
28. If applied overhead exceeds actual overhead, cost of goods sold must be increased by the amount of the overapplied
overhead in a job order costing system.
29. Job order cost cards and cost flows through the inventory accounts form the core of a job order costing system.
30. Regardless of the cost accounting system used, when the products are completed, they are transferred from work in
process inventory to finished goods inventory.

1. Which of the following statements is (are) true?
A) A manufacturer of paper would ordinarily use process costing rather than job-order costing.
B) If a company uses a process costing system it accumulates costs by processing department rather than
by job.
C) The output of a processing department must be homogeneous in order to use process costing.
D) All of the above are true statements.
2. In a process costing system, the journal entry used to record the transfer of units from Department A, a
processing department, to Department B, the next processing department, includes a debit to:
A) Work in Process – Department A and a credit to Work in Process – Department B.
B) Work in Process – Department B and a credit to Work in Process – Department A.
C) Work in Process – Department B and a credit to Materials.
D) Finished Goods and a credit to Work in Process – Department B.
3. Goethe Company uses the weighted-average method in its process costing system. The following information
was available about one of the company’s processing departments:
There were 108,000 equivalent units of production with respect to conversion costs during the current month.

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There were 15,000 units in the department's beginning work in process inventory, which were two-thirds complete with
respect to conversion costs.
During the current month, 105,000 units were started and 100,000 were completed and transferred out of the
The ending work in process inventory in the department:
A) was 40% complete with respect to conversion costs. C) consisted of 5,000 units.
B) was 65% complete with respect to conversion costs. D) consisted of 10,000 units.
4. Golden Company uses the weighted-average method in its process costing system. The following information
was available for one of its processing departments:
The beginning work in process inventory consisted of 16,000 units, which were 75% complete with respect to conversion
The department converted the equivalent of 59,000 units of production during the current month.
A total of 50,000 units were completed and transferred out of that department during the current month.
The ending work in process inventory consisted of 12,000 units, which were 50% complete with respect to conversion
The number of units started during the month in that department was:
A) 29,000 units. B) 42,000 units. C) 46,000 units. D) 54,000 units.
5. Barnes Company uses the weighted-average method in its process costing system. The company sold 250,000
units during the current month. The following data were taken from the company's accounting records:
What were the equivalent units of production for conversion costs in the Packing Department for the current month?
A) 153,000 B) 235,000 C) 247,000 D) 251,000
6. Zook Company uses the weighted-average method in its process costing system. The following data for the
Mixing Department were taken from the company’s accounting records.
The equivalent units of production for conversion costs were:
A) 200,000 units. B) 204,000 units. C) 222,000 units. D) 224,000 units.
7. Addingly Company uses the weighted-average method in its process costing system. The following information
pertains to one of its processing departments for the current month:
All materials are added at the beginning of the process. The cost per equivalent unit for materials is closest to:
A) $0.25. B) $0.34. C) $0.44. D) $1.48.
8. Erie Company uses the weighted-average method in its process costing system. The company has only a single
processing department. The company's ending work in process inventory consisted of 36,000 units. The units in the
ending work in process inventory were 50% complete with respect to materials and 30% complete with respect to labor
and overhead. If the costs per equivalent unit for the current period were $5.50 for materials and $8.50 for labor and
overhead, the total cost assigned to the ending work in process inventory was:
A) $151,200. B) $160,200. C) $252,000. D) $190,800.
9. Ontario Company uses the weighted-average method in its process costing system. The Baking Department is
the third department in its production process. The data below summarize the department's operations during
the current month:
The Baking Department's production report indicates that the cost per equivalent unit for conversion cost for the current
month was $8.24. How much conversion cost was assigned to the units transferred out of the Baking Department during
the current month?
A) $964,574.40 B) $1,005,280 C) $1,046,480 D) $1,122,288
10. The beginning work in process inventory in the Milling Department consisted of 10,000 units, 50% complete
with respect to materials cost and 60% complete with respect to conversion costs. The total cost of the
beginning inventory was $60,000. During the month, 50,000 units were transferred out of this department. The
equivalent unit cost was computed to be $4.00 for materials and $7.40 for conversion costs under the weighted-
average method. Given this information, the total cost of the units completed and transferred out of this
department during the month was:
A) $480,000. B) $510,000. C) $540,000. D) $570,000.
11. The type of product costing system used by a company is dictated by the 
A. cost flow assumptions made by the company. C. inventory system used by the company.
B. production process of the product. D. selling price of the product.
12. Which of the following represents the product costs on the income statement? 
A. Cost of goods sold B. Sales revenue C. Sales commissions D. None of these 
13. Which of the following is a document prepared every period for each process? 
A. Process cost card B. Process cost report C. Process cost control sheet D. Process cost
recognition card
14. In which of the following situations should a company use process costing rather than job order costing? 
A. If the product cost is accumulated in a single Work in Process Inventory account
B. If the product is produced based on individual customer specifications

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C. If the product is composed of mass-produced homogeneous units
D. If the product goes through a single stage of production
15. Which of the following firms would most likely use a process costing system? 
A. Firm providing legal services B. Firm manufacturing papers
C. Firm providing advertising services D. Firm printing wedding invitations
16. Which of the following characteristics applies to process costing, but does not apply to job order costing? 
A. The use of single Work in Process accounts B. The use of equivalent units
C. Separate, identifiable jobs D. The use of predetermined overhead rates 
17. Which of the following is not an objective of product costing systems? 
A. To provide information for cost planning B. To assist in the preparation of the income statement
C. To determine the taxable profits D. To provide information for product pricing 
18. Which of the following is a characteristic of a job order costing system? 
A. Uses several Work in Process Inventory accounts B. Uses job cost cards to keep track of each job in process
C. Assigns costs to specific processes D. Recognizes cost of materials when products are sold
19. Which of the following products would probably use a job order costing system? 
A. Pens B. Instant coffee
C. Computer monitors D. Advertisements
20. Process costing is applicable to production operations that 
A. utilize several processes, departments, or work cells in a series. B. do not assign overhead costs to
C. produce products that are made to order. D. produce unique products.

Quigley Company manufactures a specialized product. Department 2 adds new material to the units received from
Department 1 at the end of process. A normal loss occurs early in processing. Production and cost data for Department 2
for the month of September are as follows:

Production record (in units):

In process, September 1-75% complete for processing cost 4,000
Received from Department 1 20,000
Completed and transferred to finished goods 16,000
Lost in processing (normal) 2,000
In process, September 30-2/3 complete for process cost 6,000

Cost Record:
Work in process inventory, September 1:
Preceding department cost $ 620
Processing cost 2,000 $2,620
Cost from preceding department in September 1,800
Material cost for September 4,800
Processing cost for September 10,200

Required: Determine the following for Department 2 under (a) weighted average the method of costing and (b) the FIFO
method of costing: (1) unit costs for each cost component, (2) cost of production transferred to finished goods, (3) cost of
work in process inventory of September 30.


Problem 1. For each of the following firms, determine whether it is more likely to use job order
or process costing. This firm:

a. provides legal services.

b. is a health-care clinic.
c. manufactures shampoo.

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d. makes custom jewelry.
e. is an automobile repair shop.
f. provides landscaping services for corporations.
g. designs luxury yachts.
h. manufactures paint.
i. produces college textbooks.
j. produces candles.
k. provides property management services for real estate developers.
l. manufactures baby food.
m. manufactures canned vegetables.
n. makes wedding cakes.
o. designs custom software.
p. is a fi lm production company.
q. manufactures air mattresses for swimming pool use.

Problem 2. Following are specific types of information that can be located in a particular
account (such as WIP Inventory) or on a particular document (such as an employee time card).
For each item listed, identify the account or document that would provide the relevant
a. Total hours worked on a job by a specific employee
b. Total cost of goods manufactured during a period
c. Total cost of material issued to production for a period
d. Total product cost assigned to a particular job
e. Total manufacturing overhead cost incurred for a period
f. Total overhead cost assigned to a particular job
g. Total cost of material purchased during a period
h. Total cost of goods sold during a period
i. Total indirect labor cost incurred during a period
j. Total direct labor cost incurred during a period

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Problem 3. Nottaway Flooring produces custom-made floor tiles. The company’s Raw Material
Inventory account contains both direct and indirect materials. Until the end of April 2010, the
company worked solely on a large job (#4263) for a major client. Near the end of the month,
Nottaway began Job #4264. The following information was obtained relating to April production
1. Raw material purchased on account, $204,000.
2. Direct material issued to Job #4263 cost $163,800; indirect material issued for that job
cost $12,460. Direct material costing $1,870 was issued to start production of Job #4264.
3. Direct labor hours worked on Job #4263 were 3,600. Direct labor hours for Job #4264
were 120. All direct factory employees were paid $15 per hour.
4. Actual factory overhead costs incurred for the month totaled $68,700. This overhead
consisted of $18,000 of supervisory salaries, $21,500 of depreciation charges, $7,200 of
insurance, $12,500 of indirect labor, and $9,500 of utilities. Salaries, insurance, and
utilities were paid in cash, and indirect labor charges were accrued.
5. Overhead is applied to production at the rate of $18 per direct labor hour.

Beginning balances of Raw Material Inventory and Work in Process Inventory were,
respectively, $4,300 and $11,400. Of the beginning WIP balance, $800 was related to Job #4263.
Job #4263 was completed during April.
a. Prepare journal entries for Transactions 1–5.
b. Determine the balance in Raw Material Inventory at the end of the month.
c. Determine the balance in Work in Process Inventory at the end of the month.
d. Determine the cost of the goods manufactured during April. If completed goods consist
of 10,000 similar units, what was the cost per unit?
e. What is the amount of underapplied or overapplied overhead at the end of
f. April?


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