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.
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