CPA REVIEW SCHOOL OF THE PHILIPPINESManila

MANAGEMENT ADVISORY SERVICESACTIVITY-BASED COSTING

THEORY1. An accounting system that collects financial and operating data on the basis of the underlying

nature and extent of the cost drivers isa. Direct costing. c. Cycle-time costing.b. Activity-based costing. d. Variable costing.

2. The resource utilized by a given product divided by the total amount of the resource available is called thea. Activity driver. c. Cost object.b. Consumption ratio. d. Sustaining activity.

3. Which of the following statements is true? a. The traditional approach to costing uses many different cost drivers.b. Costs that are indirect to products are by definition traceable directly to products.c. Costs that are indirect to products are traceable to some activity.d. All of the above statements are true.

4. Mass customization can be achieved through the use ofa. Activity-based costing. c. Flexible manufacturing systems.b. just-in-time inventory. d. all of the above.

5. Process value analysis is a key component of activity-based management that links product costing and a. Reduction of the number of cost pools.b. Continuous improvement.c. Accumulation of heterogeneous cost pools.d. Overhead rates based on broad averages.

6. An approach to developing new ways to perform existing activities is calleda. Process value analysis. c. Caveat analysis.b. Re-engineering. d. Benchmarking.

7. A(n) _______________ method first traces costs to a department and then to products.a. direct costing c. traditional costingb. absorption costing d. activity-based costing

8. A(n)_______________ method first traces costs to activities and then to products.a. direct costing c. traditional costingb. absorption costing d activity-based costing

9. Uniformly assigning the costs of resources to cost objects when those resources are actually used in a nonuniform way is called a. overcosting. c. peanut-butter costing.b. undercosting. d. department costing.

10. An objective of activity-based management is to a. eliminate the majority of centralized activities in an organization.b. reduce or eliminate non-value-added activities incurred to make a product or provide a

service.c. institute responsibility accounting systems in decentralized organizations.d. all of the above

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11. Symptoms of an outdated cost system include all of the following EXCEPT a. product costs change because of changes in financial reporting.b. products that are difficult to produce show little profit.c. competitors’ prices appear unrealistically low.d. the company has a highly profitable niche all to itself.

12. Traditional overhead allocations result in which of the following situations?a. Overhead costs are assigned as period costs to manufacturing operations.b. High-volume products are assigned too much overhead, and low-volume products are

assigned too little overhead.c. Low-volume products are assigned too much, and high-volume products are assigned too

little overhead.d. The resulting allocations cannot be used for financial reports.

13. Traditionally, managers have focused cost reduction efforts on a. activities. b. processes. c. departments. d. costs.

14. Which of the following is NOT a trait of a traditional cost management system?a. unit-based drivers c. allocation intensive b. focus on managing activities d. narrow and rigid product costing

15. Unit-level cost drivers are most appropriate as an overhead assignment base when a. several complex products are manufactured. b. only one product is manufactured.c. direct labor costs are low.d. factories produce a varied mix of products.

16. Which of the following is NOT a sign of poor cost data?a. Competitors’ prices for high-volume products appear much too high.b. The company seems to have a highly profitably niche all to itself.c. Customers don’t balk at price increases for low-volume products.d. Competitors’ prices for low-volume products appear much too high.

17. In Activity-based Costing, which of the following would be considered a value-added activity?a. Repair of machines. c. Bookkeeping.b. Engineering designs. d. Storage of inventory.

18. In the pharmaceutical or food industries, quality control inspections would most likely be viewed as a. non-value-added activities. c. value-added-activities.b. business-value-added activities. d. process-efficiency activities.

19. A basic assumption of activity-based costing (ABC) is that a. All manufacturing costs vary directly with units of production.b. Products or services require the performance of activities, and activities consume

resources.c. Only costs that respond to unit-level drivers are product costs.d. Only variable costs are included in activity-cost pools.

20. Activity-based costing and generally accepted accounting principles differ in that ABC a. does not define product costs in the same manner as GAAP.b. cannot be used to compute an income statement, but GAAP can.c. is concerned only with costs generated from automated processes, but GAAP is

concerned with costs generated from both manual and automated processes.d. information is useful only to managers, while GAAP information is useful to all

organizational stakeholders.

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21. ABC should be used in which of the following situations?a. single-product firms with multiple stepsb. multiple-product firms with only a single processc. multiple-product firms with multiple processing stepsd. in all manufacturing firms

22. All of the following are examples of non-value-added activities except:A. reworking B. handling C. assembling D. expediting

23. Products make diverse demands on resources because of differences in all of the following EXCEPT a. volume. b. selling price. c. batch size. d. complexity.

24. The UNIQUE feature of an ABC system is the emphasis on a. costing individual jobs. c. multiple-cost pools.b. department indirect-cost rates. d. individual activities.

25. Design of an ABC system requires a. that the job bid process be redesigned. b. that a cause-and-effect relationship exists between resource costs and individual

activities.c. an adjustment to product mix. d. both (b) and (c).

26. ABC systems create a. one large cost pool.b. homogenous activity-related cost pools.c. activity-cost pools with a broad focus.d. activity-cost pools containing many direct costs.

27. Which of the following statements about activity-based costing is not true?a. Activity-based costing is useful for allocating marketing and distribution costs.b. Activity-based costing is more likely to result in major differences from traditional

costing systems if the firm manufactures only one product rather than multiple products.c. In activity-based costing, cost drivers are what cause costs to be incurred.d. Activity-based costing differs from traditional costing systems in that products are not

cross-subsidized.

28. If activity-based costing is implemented in an organization without any other changes being effected, total overhead costs willa. be reduced because of the elimination of non-value-added activities.b. be reduced because organizational costs will not be assigned to products or services.c. be increased because of the need for additional people to gather information on cost

drivers and cost pools.d. remain constant and simply be spread over products differently.

29. The use of activity-based costing normally results in a. Substantially greater unit costs for low-volume products than is reported by traditional

product costing.b. Substantially lower unit costs for low-volume products than is reported by traditional

product costing.c. Decreased setup costs being charged to low-volume products.d. Equalizing setup costs for all product lines.

30. _____ are those performed each time a unit is produced or sold.a. Batch-level activities. c. Sustaining activities.b. Facility-sustaining activities. d. Unit-level activities.

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31. What is the normal effect on the numbers of cost pools and allocation bases when an activity-based cost (ABC) system replaces a traditional cost system?

a. b. c. d.Cost Pools No effect Increase No effect IncreaseAllocation Bases No effect No effect Increase Increase

32. 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. Machinery and equipment are arranged in operating cells that produce a complete product starting with raw materials. Which of the following are characteristic of Boo’s activity-based costing approach? I. Cost drivers are used as a basis for cost allocation.II. Costs are accumulated by department or function for purposes of product costing.III. Activities that do not add value to the product are identified and reduced to the extent

possible.a. I only. b. I and II. c. I and III. d. II and III.

33. The ideal standard quantity for nonvalue-added activities isa. the cost of resources acquired in advance of usageb. practical capacityc. the currently attainable quantity standardd. zero

34. Examples of activities at the unit level of costs include: A. cutting, painting, and packaging C. designing, changing, and advertisingB. scheduling, setting up, and moving D. heating, lighting, and security

35. _____ 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.

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

37. If JIT manufacturing is used, maintenance of the production equipment would be classified as a a. unit-level activity c. cell-level activityb. product-level activity d. facility-level activity

38. Which of the following is not a type of sustaining activity?a. Capacity-sustaining. c. Distribution-channel sustaining.b. Customer-sustaining. d. Unit-sustaining.

39. Testing a prototype of a new product is an example of a a. Unit-level activity. c. Product-level activity.b. Batch-level activity. d. Organization-sustaining activity.

40. Examples of activities at the product level of costs include:A. cutting, painting, and packaging C. designing, changing, and advertisingB. scheduling, setting up, and moving D. heating, lighting, and security

41. In allocating variable costs to products,a. a volume-based cost driver should be used.b. direct labor hours should always be used as the allocation base.c. a company should use the same allocation base that it uses for fixed costs.d. a company should never use more than one cost driver.

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42. The following items are used in tracing costs in an ABC system. In which order are they used? (1) cost object (2) cost driver (3) activity driver (4)cost poola. 1, 2, 3, 4 b. 2, 3, 4, 1 c. 2, 4, 3, 1 d. 4, 3, 1, 2

43. _____ relate to an entire plant as a whole.a. Batch-level activities. c. Sustaining activities.b. Facility-sustaining activities. d. Unit-level activities.

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

45. An item or event that has a cause-effect relationship with the incurrence of a variable cost is called aa. mixed cost. b. predictor. c. direct cost. d. cost driver.

46. Which of the following is typically regarded as a cost driver in traditional accounting practices?a. number of purchase orders processed c. number of transactions processedb. number of customers served d. number of direct labor hours worked

47. A cost pool isa. All of the costs of a particular department.b. All costs in a group such as variable costs or discretionary fixed costs.c. All costs related to a product or product line.d. All costs that have the same driver.

48. The activities that drive resource requirements are called thea. Activity drivers. c. Resource drivers.b. Cost objects. d. Sustaining activities.

49. __________________ are causal factors that explain the consumption of overhead. a. Activity drivers b. Cost pools d. Cost catchers c. Cost objectives

50. All of the following are unit-based activity drivers EXCEPT a. machine hours b. number of setups c. number of units d. direct labor hours

51. All of the following are nonunit-based activity drivers EXCEPT a. number of setups c. number of inspectionsb. number of direct labor hours d. number of material moves

52. In an activity-based costing system, what should be used to assign a department’s manufacturing overhead cost to products produced in varying lot sizes?a. A single cause and effect relationship. c. Relative net sales values of the products.b. Multiple cause and effect relationships. d. A product’s ability to bear cost allocations.

53. In activity-based costing, preliminary cost allocations assign costs to a. departments. b. processes. c. products. d. activities.

54. In activity-based costing, final cost allocations assign costs toa. departments. b. processes. c. products. d. activities.

PROBLEMS1. A time-and-motion study revealed that it should take 1 hour to produce a product that

currently takes 3 hours to produce. Labor is $8 per hour. Nonvalue-added costs area. $8 b. $16 c. $24 d. $0

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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 area. $144 b. $132 c. $24 d. $12

3. Each unit of product requires 8 gallons of raw material. Due to scrap and rework, each unit has been averaging 9 gallons of raw material. The raw material costs $4 per gallon. Value-added costs area. $2 b. $4 c. $32 d. $36

4. A company keeps 20 days of raw materials inventory on hand to avoid shutdowns due to raw materials shortages. Carrying costs average $2,000 per day. A competitor keeps 10 days of inventory on hand the competitor’s carrying costs average $1,000 per day. Value-added costs area. $40,000 b. $20,000 c. $10,000 d. $0

5. New Rage Cosmetics has used a traditional cost accounting system to apply quality control costs uniformly to all products at a rate of 14.5% of direct labor cost. Monthly direct labor cost for Satin Sheen makeup is $27,500. In an attempt to distribute quality control costs more equitably, New Rage is considering activity-based costing. The monthly data shown in the chart below have been gathered for Satin Sheen.

Activity Cost Driver Cost RatesQuantity forSatin Sheen

Incoming material inspection Type of material $11.50 per type 12 typesIn-process inspection Number of units $0.14 per unit 17,500 unitsProduct certification Per order $77per order 25 orders

The monthly quality control cost assigned to Satin Sheen makeup using activity-based costing isa. $88.64 per order.b. $525.50 lower than the cost using the traditional system.c. $8,500.50d. $525.50 higher than the cost using the traditional system.

Questions 6 thru 8 are based on the following information.Dierich Company uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system:

Costs: Manufacturing overhead $600,000 Selling and admin. expenses $220,000 Total $820,000

Distribution of resource consumption:Activity Cost Pools

Order Size Customer Support Other TotalManufacturing overhead 15% 75% 10% 100%Selling and admin. Expenses 60% 20% 20% 100%

The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs. You have been asked to complete the first-stage allocation of costs to the activity cost pools.

6. How much cost, in total, would be allocated in the first-stage allocation to the Order Size activity cost pool?a. $222,000 b. $307,500 c. $123,000 d. $492,000

7. How much cost, in total, should NOT be allocated to orders and products in the second stage of the allocation process if the activity-based costing system is used for internal decision-making?a. $82,000. b. $104,000. c. $0. d. $164,000.

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8. How much cost, in total, would be allocated in the first-stage allocation to the Customer Support activity cost pool?a. $389,500 b. $615,000 c. $164,000 d. $494,000

9. ALF Co. is an assisted-living facility that provides services in the form of residential space, meals, and other occupant assistance (OOA) to its occupants. ALF currently uses a traditional cost account system that defines the service provided as assisted living, with service output measured in terms of occupant days. Each occupant is charged a daily rate equal to ALF’s annual cost of providing residential space, meals and OOA divided by total occupant days. However, an activity-based costing (ABC) analysis has revealed that occupant’s use of OOA varies substantially. This analysis determined that occupants could be grouped into three categories (low, moderate, and high usage of OOA) and that the activity driver of OOA is nursing hours. The driver of the other activities is occupant days. The following quantitative information was also provided:Occupant category Annual Occupant Days Annual Nursing HoursLow Usage 36,000 90,000Medium Usage 18,000 90,000High Usage 6,000 120,000

60,000 300,000The total annual cost of OOA was $7.5 million, and the total annual cost of providing residential space and meals was $7.2 million. Accordingly, the ABC analysis indicates that the daily costing rate should be a. $182.50 for occupants in the low-usage category.b. $145.00 for occupants in the medium-usage category.c. $245.00 for occupants in the high-usage category.d. $620.00 for all occupants.

Questions 10 through 13 are based on the following information.Zebra Corporation has the following activities: creating bills of materials (BOM), studying manufacturing capabilities, improving manufacturing processes, training employees, and designing tooling. The general ledger accounts reveal the following expenditures for manufacturing engineering:

Salaries $150,000Equipment 80,000Supplies 20,000Total $250,000

The equipment is used for two activities: improving processes and designing tooling. Thirty-five percent of the equipment’s time is used for improving processes and sixty-five percent is used for designing tools. The salaries are for two engineers. One is paid $100,000, while the other earns $50,000. The $100,000 engineer spends 40% of his time training employees in new processes and 60% of his time on improving processes. The remaining engineer spends equal time on all activities. Supplies are consumed in the following proportions:

Creating BOMs 25%Studying capabilities 10%Improving processes 20%Training employees 25%Designing tooling 20%

10. What is the cost assigned to the creating BOMs activity?a. $62,500 b. $15,000 c. $87,500 d. $250,000

11. What is the cost assigned to the improving processes activity?a. $250,000 b. $50,000 c. $87,500 d. $102,000

12. What is the cost assigned to the training employees activity?a. $55,000 b. $250,000 c. $62,500 d. $162,500

13. What is the cost assigned to the designing tooling activity?a. $162,500 b. $66,000 c. $50,000 d. $250,000

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Questions 14 through 16 are based on the following information.A company has identified the following overhead costs and cost drivers for the coming year.

Overhead Item Cost Driver Budgeted Cost Budgeted Activity LevelMachine setup No. of setups $ 20,000 200Inspection No. of inspections $130,000 6,500Material handling No. of material moves $ 80,000 8,000Engineering Engineering hours $ 50,000 1,000

$280,000The following information was collected on three jobs that were completed during the year:

Job 101 Job 102 Job 103Direct materials $5,000 $12,000 $8,000Direct labor $2,000 $ 2,000 $4,000Units completed 100 50 200Number of setups 1 2 4Number of inspections 20 10 30Number of material moves 30 10 50Engineering hours 10 50 10

Budgeted direct labor cost was $100,000, and budgeted direct material cost was $280,000.14. If the company uses activity-based costing, how much overhead cost should be allocable to

Job 101?a. $1,300 b. $2,000 c. $5,000 d. $5,600

15. If the company uses activity-based costing, compute the cost of each unit of Job 102.a. $340 b. $392 c. $440 d. $520

16. The company prices its products at 140% of cost. If the company uses activity-based costing, the price of each unit of Job 103 would bea. $98 b. $100 c. $116 d. $140

Questions 17 thru 22 are based on the following informationSpecial Products recently installed an activity-based relational data base. Using the information contained in the activity relational table, the following pool rates were computed:

$200 per purchase order$12 per machine hour, process A$15 per machine hour, process B$40 per engineering hour

Two products are produced by Special Products: A and B. Each product has an area in the plant that is dedicated to its production. The plant has two manufacturing processes, process A and process B. Other processes include engineering, product handling and procurement. The product relational table for Special is as follows:

Activity Driver # NameActivity Usage

Product A Product B1 Units 200,000 25,0002 Purchase orders 250 1253 Machine hours 80,000 10,0004 Engineering hours 1,250 1,500

17. How much overhead cost will be assigned to product A using the number of purchase orders?a. $50,000 b. $25,000 c. $40,000,000 d. $66,750

18. How much overhead cost will be assigned to product B using engineering hours?a. $50,000 b. $60,000 c. $1,000,000 d. $400,500

19. How much overhead cost will be assigned to product A using process A?a. $1,200,000 b. $2,400,000 c. $960,000 d. $120,000

20. How much overhead cost will be assigned to product B using process B?a. $1,200,000 b. $960,000 c. $120,000 d. $150,000

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21. What is the unit cost of Product A?a. $4.71 b. $3.76 c. $252.00 d. $5.30

22. What is the unit cost of Product B?a. $9.40 b. $6.00 c. $252.00 d. $6.41

Questions 23 thru 26 are based on the following information.Acton Company has two products: A and B. The annual production and sales of Product A is 800 units and of Product B is 500 units. The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labor hours per unit and Product B requires 0.2 direct labor hours per unit. The total estimated overhead for next period is $92,023. The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools--Activity 1, Activity 2, and General Factory--with estimated overhead costs and expected activity as follows:

Activity Cost PoolEstimated

Overhead CostsExpected Activity

Product A Product B TotalActivity 1 $14,487 500 600 1,100Activity 2 $64,800 2,500 500 3,000General Factory $12,736 240 100 340

Total $92,023(Note: The General Factory activity cost pool's costs are allocated on the basis of direct labor hours.)

23. The predetermined overhead rate under the traditional costing system is closest to:a. $37.46. b. $21.60. c. $13.17. d. $270.66.

24. The overhead cost per unit of Product B under the traditional costing system is closest to:a. $54.13. b. $7.49. c. $4.32. d. $2.63.

25. .The predetermined overhead rate (i.e., activity rate) for Activity 1 under the activity-based costing system is closest to:a. $28.97. b. $13.17. c. $83.66. d. $24.15.

26.The overhead cost per unit of Product A under the activity-based costing system is closest to:a. $86.97. b. $70.79. c. $81.20. d. $11.24.

Question 27 through 30 are based on the following information. This information was presented as part of Question 3 on Part 3 of the June 1992 CMA examination, which covered activity-based costing.Alaire Corporation manufactures several different types of printed circuit boards: however, two of the boards account for the majority of the company’s sales. The first of these boards, a television (TV) circuit board, has been a standard in the industry for several years. The market for this type 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) circuit board, is a recent addition to Alaire’s product line. Because the PC board incorporates the latest technology, it can be sold at a premium price, plans include the sale of 40,000 PC boards at $300 per unit.Alaire’s management group is meeting to discuss strategies for 1993, and the current topic of conversation is how to spend the sales and promotion dollars for next year. The sales manager believe that the market share for the TV board could be expanded by concentrating Alaire’s promotional efforts in this area. In response to this suggestion, the production manager said, “Why don’t you go after a bigger market for the PV board? The cost sheets that I get show a premium price for the PC board, selling it should help overall profitability.”Alaire uses a standard cost system, and the following data apply to the TV and PC boards.

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TV Board PC BoardDirect materials $80 $140Direct labor 1.5 hours 4.0 hoursMachine time 0.5 hours 1.5 hours

Variable factory overhead is applied on the basis of direct labor hours. For 1993, variable factory is budgeted at $1,120,000, and direct labor hours are estimated at 280,000. The hourly rates for machine time and direct labor are $10 and $14, respectively. Alaire applies a material handling charge at 10% of materials cost, thus materials handling charge is not included in variable factory overhead. Total 1993 expenditures for materials are budgeted at $10,600,000.Ed Watch, Alaire’s controller, believes that, the management group proceeds with the discussion about allocating sales and promotional dollars to individual products, they should consider the activities involved in the production. As Welch explained to the group, “Activity-based costing 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 the management group understand this concept.“Using this information,” Welch explained, “we can calculate an activity-based cost for each TV 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 will replace the direct labor, machine time, and overhead costs in the standard cost.”

Budgeted Cost Cost DriverAnnual Activity for Cost Driver

Materials overhead:Procurement $400,000 No. of parts 4,000,000 partsProduction scheduling 220,000 No. of boards 110,000 boardsPackaging & shipping 440,000 No. of boards 110,000 boards

$1,060,000Variable overhead:Machine setup $446,000 No. of setups 278,750 setupsHazardous waste disposal 48,000 Lbs. of waste 16,000 lbs.Quality control 560,000 No. of inspections 160,000 inspect’nsGeneral supplies 66,000 No. of boards 110,000 boards

$1,120,000Manufacturing:Machine insertion $1,200,000 No. of parts 3,000,000 partsManual insertion 4,000,000 No. of parts 1,000,000 partsWave soldering 132,000 No. of boards 110,000 boards

$5,332,000

Required per unit TV Board PC BoardsParts 25 55 Machine insertions 24 35 Manual insertions 1 20Machine setups 2 3Hazardous waste 0.02 lbs. 0.35 lbs.Inspections 1 2

27. On the basis of standard costs, the total contribution budgeted for the TV board isa. $1,950,000 b. $2,275,000 c. $2,340,000 d. $2,470,000

28. On the basis of activity-based costs (ABC), the total contribution budgeted for the TV board isa. $1,594,000 b. $1,950,000 c. $2,037,100 d. $2,557,100

29. On the basis of standard costs, the total contribution budgeted for the PC board isa. $3,000,000 b. $2,960,000 c. $2,920,000 d. $2,360,000

30. On the basis of activity-based costs, the total contribution budgeted for the PC board isa. P1,594,000 b. $1,950,000 c. $2,360,000 d. $2,557,100

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Answer Key

Theory1. B 11. B 21. C 31. D 41. A 51. B2. B 12. B 22. C 32. C 42. C 52. B3. C 13. D 23. B 33. D 43. B 53. D4. C 14. B 24. D 34. A 44. D 54. C5. B 15. B 25. B 35. A 45. D6. B 16. A 26. B 36. B 46. D7. C 17. B 27. B 37. C 47. D8. D 18. C 28. D 38. D 48. C9. C 19. B 29. A 39. C 49. A10. B 20. A 30. D 40. C 50. B

Problems1. B 11. D 21. D2. D 12. A 22. A3. C 13. B 23. D4. D 14. A 24. A5. D 15. A 25. B6. A 16. A 26. A7. B 17. A 27. A8. D 18. B 28. D9. A 19. C 29. D10. B 20. D 30. A

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