ACC622M-3-H

# ACC622M-3-H - GROUP 3 Hydrochem Inc Actual v Standard Cost...

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GROUP 3 Hydrochem, Inc. Actual v. Standard Cost Accounting Systems

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Introduction Hydrochem Inc. processed oxide to make blank condutronic plates. The company maintained an actual process costing system as the basis for cost of goods sold determination 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 that identification of any deviations from the 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. Dang calculates the company's current standard cost per plate to be \$21.65 and found that typically the company produced and sold 70,000 plates each month at an average sales price of \$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 a normal production volume. Of the 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. In order to determine which would be a better system for Hydrochem, standard or actual, Dang decided to create two sets of balance sheets and income statements so that she may analyze the results and determine an answer. Literature Review Companies that use process-costing systems produce masses of identical or similar units of output. In such companies, it is fairly easy to set standards for quantities of inputs needed to produce output. Standard cost per input unit can then be multiplied by input quantity standards to develop standard cost per output unit. Complex conditions are frequently found, for example, in plants which manufacture rubber products, textiles, ceramics, paints, and packaged food products. In each of these cases, the broad averaging procedure of actual process costing were used, the result would be inaccurate costs for each product. Therefore, the standard-costing method of process costing is widely used in these industries. Under the standard-costing method, teams of design and process engineers, operations personnel, and management accountants work together to determine separate standard costs per equivalent unit on the basis of different technical processing specifications for each product. Identifying standard costs for each product overcomes the disadvantage of costing all products at a single average amount, as under actual costing. A standard costing system is a costing system that traces direct costs to output produced by multiplying the standard

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## This note was uploaded on 03/31/2011 for the course ACC 622 taught by Professor Chroi during the Spring '11 term at St. John's.

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ACC622M-3-H - GROUP 3 Hydrochem Inc Actual v Standard Cost...

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