OVT Corporation manufactures picture frames. Production takes place in three departments, described below:
Cutting: Machines cut 6-foot boards into 3-, 6- and 12-centimetre lengths.
Assembly: Individual pieces of wood are glued together in square and rectangular shapes.
Finishing: The picture frames are painted, lacquered, and dried. They are then packed into boxes of 100 frames each and shipped to retailers.
Inventory levels and costs at OVT are fairly constant, at the amounts shown in the following table:
Ending WIP Stage of Completion Department Cost
Inventory Direct Conversion Per Equivalent
(units)Materials Costs Unit
Cutting 150 100% 40% $1)15
Assembly 250 100% 30% 0)75
Finishing 200 100% 70% 2)10
Total cost per equivalent unit $4)00
Finished goods inventory (i.e., boxes of completed frames awaiting shipment)is typically around 300; each box of 100 frames has an approximate total cost of $450.
a)Identify and describe two risks that OVT faces as a result of keeping 300 boxes of finished goods inventory on hand.
b)Should the cost per equivalent unit in each department to be the same from month to month? If so, explain why. If not, identify two reasons why the cost of a picture frame might vary over time.
c)Notice that the department cost per equivalent unit (excluding transferred-in costs)is lowest in the Assembly Department and highest in the Finishing Department. Recalling that the cost per equivalent unit is made up of direct material, direct labour and overhead, suggest two reasons why the Assembly Department's cost is lowest.
d)OVT is considering implementing more automation in its production operation. For example, frames are currently painted and lacquered by hand in the Finishing Department. OVT's president, Max Kinley, wants to replace most of the direct labour workers in the Finishing Department with painting and lacquering machines. Explain how the use of machines in place of direct labour workers would affect the direct labour cost and overhead cost per equivalent unit.
e)OVT currently calculates the cost of picture frames using the weighted average method. However, it could use the FIFO method. Explain the similarities and differences between the two methods. Discuss one pro and one con of using the weighted average method.
f)Abnormal spoilage is accounted for in a separate account in the accounting information system, such as "Loss from Abnormal Spoilage." There is no single, correct way to account for spoilage because it requires judgment on a number of points: What constitutes normal vs. abnormal spoilage? How do managers view spoilage in the production system?
g)Additional uncertainties associated with using process costing to calculate the cost of a picture frame include (but are not limited to):
* Determining the pattern in which conversion costs are added to production
* Determining the pattern in which direct materials are added to production, if they are added other than at the beginning
* Distinguishing between normal and abnormal spoilage

Question

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The Answer of OVT Corporation manufactures picture frames. Production takes place in three departments, described below:
Cutting: Machines cut 6-foot boards into 3-, 6- and 12-centimetre lengths.
Assembly: Individual pieces of wood are glued together in square and rectangular shapes.
Finishing: The picture frames are painted, lacquered, and dried. They are then packed into boxes of 100 frames each and shipped to retailers.
Inventory levels and costs at OVT are fairly constant, at the amounts shown in the following table:
Ending WIP Stage of Completion Department Cost
Inventory Direct Conversion Per Equivalent
(units)Materials Costs Unit
Cutting 150 100% 40% $1)15
Assembly 250 100% 30% 0)75
Finishing 200 100% 70% 2)10
Total cost per equivalent unit $4)00
Finished goods inventory (i.e., boxes of completed frames awaiting shipment)is typically around 300; each box of 100 frames has an approximate total cost of $450.
a)Identify and describe two risks that OVT faces as a result of keeping 300 boxes of finished goods inventory on hand.
b)Should the cost per equivalent unit in each department to be the same from month to month? If so, explain why. If not, identify two reasons why the cost of a picture frame might vary over time.
c)Notice that the department cost per equivalent unit (excluding transferred-in costs)is lowest in the Assembly Department and highest in the Finishing Department. Recalling that the cost per equivalent unit is made up of direct material, direct labour and overhead, suggest two reasons why the Assembly Department's cost is lowest.
d)OVT is considering implementing more automation in its production operation. For example, frames are currently painted and lacquered by hand in the Finishing Department. OVT's president, Max Kinley, wants to replace most of the direct labour workers in the Finishing Department with painting and lacquering machines. Explain how the use of machines in place of direct labour workers would affect the direct labour cost and overhead cost per equivalent unit.
e)OVT currently calculates the cost of picture frames using the weighted average method. However, it could use the FIFO method. Explain the similarities and differences between the two methods. Discuss one pro and one con of using the weighted average method.
f)Abnormal spoilage is accounted for in a separate account in the accounting information system, such as "Loss from Abnormal Spoilage." There is no single, correct way to account for spoilage because it requires judgment on a number of points: What constitutes normal vs. abnormal spoilage? How do managers view spoilage in the production system?
g)Additional uncertainties associated with using process costing to calculate the cost of a picture frame include (but are not limited to):
* Determining the pattern in which conversion costs are added to production
* Determining the pattern in which direct materials are added to production, if they are added other than at the beginning
* Distinguishing between normal and abnormal spoilage

OVT Corporation Manufactures Picture Frames