Owl's Hours Produces Herbal Tea and Prides Itself in Having

question 65

Multiple Choice

Owl's Hours produces herbal tea and prides itself in having one of the largest ranges of herbal teas in Australia. It sells more than 50 varieties of tea leaves with a wide range of prices (depending on where the tea leaves are grown) . The production processes of its products is simple, but vary depending on whether the tea is sold as loose leaves (which requires packing tea leaves in various sized boxes) or tea bags (which requires additional process in packaging tea in specially designed tea bags) . Owl's Hours decides to use an operation costing system. This decision is

• A) correct, because the company uses a large variety of tea leaves as direct materials and yet has simple production processes.
• B) correct, because the company uses a large variety of tea leaves as direct materials and the different products require different sequences of processes.
• C) incorrect, because the different production lines require the tea leaves to be packaged in very distinctive methods.
• D) incorrect, because the company has a very homogenous product - it produces and sells only tea.

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Definitions:

Salvage Value

The forecasted price an asset will fetch at the time of sale once its period of usefulness is over.

Depreciation Expense

The allocation of the cost of an asset over its useful life to account for declines in value over time.

Double-declining-balance

An accelerated depreciation method that doubles the normal depreciation rate.

Salvage Value

The estimated residual value of an asset at the end of its useful life, representing what it could potentially be sold for or scrapped.