Hydrochem, Inc

Abstract

Hydrochem, Inc. produces only one product — condutronic plates. The company uses an actual process costing system but is considering changing to a standard costing system. Manufacturing costs consist of raw material, direct labor and manufacturing overhead and the company uses full absorption costing. Students are provided with account balance information at the beginning of the month and with information regarding the company's events and transactions during the month. Students are asked to prepare two income statements for the month and balance sheets as of the end of the month. One set of financial statements is to be prepared using the company's actual costing system, and the other set of financial statements is to be prepared using the proposed standard costing system. Students are asked to explain the differences between these two sets of financial statements and to take a position as to which set of financial information they prefer.

Excerpt

UVA-C-2208

HYDROCHEM, INC.

Hydrochem, Inc., processed polychloric oxide to make blank condutronic plates. The company maintained an actual process-costing system as the basis for determination of cost of goods sold and inventory valuation. However, the company's new controller, Mohini Dang, was considering adopting a standard costing system for management-reporting purposes. She believed a standard costing system would provide Hydrochem management with better information and would facilitate the identification of any deviations from plan. To test her hypothesis, Dang decided to compare Hydrochem's financial statements for the month based on actual costs with those same financial statements based on standard costs.

As a first step, Dang calculated the company's current standard cost per plate to be $ 21.65, as follows:

Raw material (4 pounds at $ 2.50/pound) $ 10.00

Direct labor (0.6 hour at $ 12.00/hour) 7.20

. . .

Keywords: actual costing system standard variance analysis