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.

Question

Quizplus · Accepted Answer

The use of an operation costing system is appropriate for Owl's Hours because the company uses a large variety of tea leaves as direct materials and the different products require different sequences of processes (packaging loose leaves vs tea bags). Operation costing allows for the accumulation of materials and conversion costs for each distinct production process, making it an appropriate costing method for Owl's Hours. Choice A is incorrect because the simple production process alone does not determine the appropriateness of an operation costing system. Choice C is incorrect because distinctive packaging methods do not necessarily preclude the use of operation costing. Choice D is also incorrect because a company producing a single product can still benefit from using an operation costing system if different production processes are involved.

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