Hydrochem, Inc. makes blank condutronic plates and is considering adopting a standard costing system for management reporting. The assistant compares financial statements prepared using actual and standard costs for the most recent month. While both methods provided accurate results, standard costing identified variances that revealed the company was deviating from its production plan through higher material costs and labor inefficiencies. The assistant recommends adopting standard costing as it would help management better monitor operations against budgets and address issues earlier through variance analysis.
Hydrochem, Inc. makes blank condutronic plates and is considering adopting a standard costing system for management reporting. The assistant compares financial statements prepared using actual and standard costs for the most recent month. While both methods provided accurate results, standard costing identified variances that revealed the company was deviating from its production plan through higher material costs and labor inefficiencies. The assistant recommends adopting standard costing as it would help management better monitor operations against budgets and address issues earlier through variance analysis.
Hydrochem, Inc. makes blank condutronic plates and is considering adopting a standard costing system for management reporting. The assistant compares financial statements prepared using actual and standard costs for the most recent month. While both methods provided accurate results, standard costing identified variances that revealed the company was deviating from its production plan through higher material costs and labor inefficiencies. The assistant recommends adopting standard costing as it would help management better monitor operations against budgets and address issues earlier through variance analysis.
Hydrochem, Inc. makes blank condutronic plates and is considering adopting a standard costing system for management reporting. The assistant compares financial statements prepared using actual and standard costs for the most recent month. While both methods provided accurate results, standard costing identified variances that revealed the company was deviating from its production plan through higher material costs and labor inefficiencies. The assistant recommends adopting standard costing as it would help management better monitor operations against budgets and address issues earlier through variance analysis.
Download as DOCX, PDF, TXT or read online from Scribd
Download as docx, pdf, or txt
You are on page 1/ 6
Hydrochem, Inc.
MANAC ASSIGNMENT – 4
Gaurav Nair – B19017
Nikhil Jindal – B19030 Ronit Ray – B19040 Sahil Gupta – B19041 Executive Summary: Hydrochem, Inc makes blank condutronic plates. They are considering adopting standard costing system for management reporting purposes. We have compared this month’s financial statements based on actual costs and standard costs. The standard manufacturing cost per plate is $21.65/-. Actual costing and Standard costing method both are required to get suitable information regarding the processes and helps in identification of any deviation from designated standard process. Standard costing system by detecting variance in the actual process from standard process and helps find out whether variance is in Material, Labor or Overhead and take suitable corrective actions if unfavorable and controllable. For Hydrochem Inc since total variance is unfavorable indicates that company is deviating from its standard plan and can improve upon material quantity used and also improve its labor’s efficiency by taking suitable steps. Differences are due to the differences between the actual raw material consumed, labor hours, plates produced, selling price, material rate, labor rate and standard figures of these items We recommend to go ahead with Standard costing as it would help the company to manage its budget and operations in a better way by reporting discrepancies at early stage to be rectified in time.
Problem Statement: Hydrochem, Inc processes polychloric oxide to make blank condutronic plates. Traditionally it has been using the process costing system for determining COGS and Inventory valuation. Company’s new controller Mohini Dang wants to adopt a Standard Costing system. The management wants to test this system, whether it would be beneficial for the company or not. Our objective is to tackle the problem at hand by comparing this month’s balance sheet and financials to ascertain whether the standard costing system provides beneficial information about deviations from the plan or is the system based on actual costs better. Q1. Prepare 2 sets of financial statements using actual and standard costs. Q2. Explain the differences. Which method should be used and why? Alternatives Available: The 2 alternatives available with the company are as follows: 1. Continue following the traditional actual costing system, which is being followed by Hydrochem, Inc for the past several years. It would show accurate results for the period with respect to the costs incurred and revenues earned. 2. Change to the proposed standard costing system as it would result in better analysis of the variances between the standard/budgeted costs and the actual costs incurred. We would be able to compute sales, material, labor and overhead variances.
Evaluation Criteria: For the best possible evaluation of the alternatives available to Hydrochem, Inc we will be preparing 2 income statements and 2 balance sheets for the month end based on the 2 alternatives available to us. We will consider the accuracy of results and the financial insights gained from the costing method. During this evaluation we will be answering Q1 and Q2 of the case.
Statement showing Overheads
Total OH 311500 (Total Fixed OH) -175000 Total Variable OH 136500 Var OH per plate 1.95 Mac Hr per plate 1.5 Var OH per Mac hr 1.3
Statement showing Standard Cost per plate
Particular Qty Rate Amount Raw Material 4 2.5 10 Direct Labour 0.6 12 7.2 Manufacturing OH ( 311500/70000units) 4.45 Standard Cost per plate 21.65 Opening Balance Sheet Particular Amount Assets Raw Mat (36000 pounds @ 2.5) 90000 FG ( 6100 plates @ 21.70) 132370 Other Assets 668000 Total 890370 Liabilities & Equity A/c Payable & Accrued Expense 170370 Other Liabilities 140000 Capital Stock 120000 Retained Earnings 460000 Total 890370
Particular Amount Assets Raw Mat (36000 2.5 + 32000 2.6) 173200 FG ( 6100 21.70 + 20000 22.176) 575890 Other Assets 1149000 Total 1898090 Liabilities & Equity A/c Payable & Accrued Expense 891650 Other Liabilities 140000 Capital Stock 120000 Retained Earnings 746440 Total 1898090 Statement showing Actual Cost Raw mat consumed 852800 Labor consumed 585280 Var OH 162000 Fixed OH 174000 total 1774080 Actual Cost per plate 22.176
Most Probable Solution:
Variance Analysis: Sales volume variance = (Actual Quantity – Standard Quantity) x Standard selling price = (60000 – 70000) x 27 = -270000 Unfavorable Sales price variance = (Actual selling price – Standard price) x Actual quantity = (26.95 – 27.00) x 60000 = -3000 Unfavorable Total Sales Value Variance = -273000 Unfavorable Material Price Variance = (Standard price – Actual price) x Actual quantity = (2.5 – 2.6) x 328000 = -32800 Unfavorable Materials quantity variance = (Standard Quantity – Actual Quantity) x Standard Price = (320000 – 328000) x 2.5 = -20000 Unfavorable Total Material Cost variance = -52800 Unfavorable Total Labor Variance = Actual Hours x Actual Rate – Standard Hours x Standard Rate = 49600 x 11.80 – 48000 x 12 = -9280 Unfavorable Hence it can be seen for the variance that in spite of making a profit this month, the Hydrochem company is still not meeting its sales figure budget by around 10,000 plates. From the individual variances we can ascertain that both material and labor variances are unfavorable, i.e., it’s not efficient on the material and labor front. Therefore, we recommend going ahead with Standard costing as it would help the company to manage it’s budget and operations in a better way by reporting discrepancies at early stage to be rectified in time.
