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Activity-based costing improves on a single overhead rate by

  • A.charging all overhead to the largest product line
  • B.tracing overhead to the activities that cause it
  • C.abolishing overhead allocation altogether
  • D.allocating overhead in proportion to sales revenue

Answer: B

Set-ups, inspections and material movements are identified as cost drivers, and products are charged for the drivers they actually consume. A low-volume product with frequent set-ups is thereby shown to cost far more than a blanket labour-hour rate suggested.

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