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

Income Statement for the month ended

Particular Qty Rate Amount
Sales 60000 26.95 1617000
(COGS) 60000 22.176 -1330560
Profits 286440

Closing Balance Sheet - Actual Costing

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.