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HYDROCHEM, INC.

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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

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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:
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Raw material (4 pounds at $2.50/pound) $10.00
Direct labor (0.6 hour at $12.00/hour) 7.20
Manufacturing overhead (allocated) 4.45
Total standard manufacturing cost per plate $21.65

Typically, the company produced and sold 70,000 plates each month at an average sales price of
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$27.00 per plate. Budgeted manufacturing overhead for factory rent, equipment depreciation,
supervision, utilities, and other manufacturing-related costs was $311,500 per month, or $4.45
per plate at normal production volume. Of this amount, $175,000 was considered to be fixed, and
the remainder varied primarily on the basis of machine hours. Each plate manufactured by
Hydrochem required 1.5 machine hours to produce.

The company’s account balances at the beginning of the month were as follows:
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Assets
Raw materials (36,000 pounds at $2.50/pound) $ 90,000
Finished goods (6,100 plates at $21.70/plate) 132,370
Other assets 668,000
Total assets $890,370
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This case was prepared by E. Richard Brownlee, II, Professor of Business Administration. It was written as a basis
for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright
 2005 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order
copies, send an e-mail to sales@dardenpublishing.com. No part of this publication may be reproduced, stored in a
retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of the Darden School Foundation.

This document is authorized for educator review use only by Amanda Acintya, Gadjah Mada University until Feb 2020. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
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Liabilities and Equity
Accounts payable and accrued expenses $170,370
Other liabilities 140,000
Capital stock 120,000
Retained earnings 460,000

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Total liabilities and equity $890,370

The following things occurred during the month:

1. 360,000 pounds of raw material were purchased on account at a price of $2.60 per pound.
2. 328,000 pounds of raw material were used in production.

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3. 49,600 hours of direct labor were incurred on account at an average cost of $11.80 per
hour.
4. 116,000 machine hours were incurred.
5. Actual manufacturing-overhead costs incurred were as follows (ignore depreciation and
assume these overhead costs were all paid):
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Fixed $174,000
Variable 162,000
Total $336,000
6. 80,000 plates were produced, and 60,000 plates were sold on account at a price of $26.95
per plate.
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7. $1,400,000 of accounts receivable were collected.

8. $800,000 was paid on accounts payable and accrued expenses.

Hydrochem used the LIFO inventory method to determine cost of goods sold and ending-
inventory balances. The company had no work-in-process inventory at the beginning or at the
end of the month.
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Required

1. Prepare two income statements for the month and two balance sheets as of the end of the
month. One set of financial statements should be based on the company’s actual process-
costing system using actual production and inventory costs. The second set should be
prepared using the proposed standard costing system, where both raw-material and
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finished-goods inventories reflect standard costs.

2. Explain the differences between the two sets of financial statements. Which costing
method should Dang use? Why?

This document is authorized for educator review use only by Amanda Acintya, Gadjah Mada University until Feb 2020. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860