MANAC-II Assignment
Hydrochem, Inc.
Standard Costing and Variance Analysis
By
Abhinav Prusty – B19001
Hari Sankar S – B19018
Soham Ghosh – B19052
Executive Summary:
HydroChem followed actual process-costing system for determining cost of goods sold and
valuation of inventory. Its core business was in making blank conductronic plates using
polychloric oxide. The firm was considering moving to standard costing system as it was more
efficient in determining deviations from plan. The new controller was looking forward to adopt
this. For this, the company’s financial statements based on actual costs were compared with
statements on standard costs.
Standard cost is a pre-determined cost to manufacture one unit of product and includes cost of
direct labour, direct materials and overhead to make a unit. Actual cost is the cost of labour,
materials and overhead actually obtained during the reporting period.
Problem Statement:
Q1)Prepare two income statements for the month and the balance at the end of the month.
One set of financial statements shall be prepared using the actual costing of the company,
and another set of financial statements shall be prepared using the proposed standard
cost system.
Ans-
Particulars Amount
Raw Materials ( 4 pounds at $2.5/pound) $10.00
Direct Labour ( 0.6 hr at $12/hr) $7.20
Manufacturing Overhead ( allocated ) $4.45
Total standard manufacturing cost / plate $21.65
Additional Data
Production per month 70000
Average sales price $27
Fixed Manufacturing Overhead $1,75,000
Variable Manufacturing Overhead $1,36,500
Total Manufacturing Overhead $3,11,500
Manufacturing Overhead per plate $4.45
Time taken to produce a plate ( in hr) 1.5
Balance Sheet in the Beginning of the Month
Assets
Raw Materials (36000 pounds at $2.5/pound) $90,000
Finished Goods ( 6100 plates at $21.7/plate) $1,32,370
Other Assets $6,68,000
Total Assets $8,90,370
Liabilities & Equity
Accounts payable & accrued expenses $1,70,370
Other Liabilities $1,40,000
Capital Stock $1,20,000
Retained Earnings $4,60,000
Total Liabilities and Equity $8,90,370
Calculating Cost of Raw Materials, Total raw material Cost Using Above Data
Cost of Raw Material Purchased Standard Actual Variance
Cost per pound $2.50 $2.6 $0.10
Raw Material Purchased(pounds) 360000 360000 0
Total cost for 360000 pounds $9,00,000 $936000 $36000
Total raw material used(pounds) 396000 396000 0
Units Produced 70000 80000 10000
Raw material used per unit (pounds) 4 4.1 0.1
Raw material used in production(pounds) 280000 328000 48000
Total raw material cost $7,00,000 $852800 $152800
We see that the total raw material cost is more than the standard value, and the reason for this
is the increase in cost of raw material per pound and raw material used per unit
Standard Actual Variance
Quantity of RM in beginning of month(pounds) 36000 36000 0
Cost per pound 2.50 2.50 0
Total Value of RM in the beginning of month $90000 $90000 0
Total Quantity of RM (beginning + produced)
(pounds) 396000 396000 0
Total Value of RM $9,90,000 $10,26,000 $36000
Cost of RM per pound $2.50 $2.59 $0.09
Cost of RM per plate $10.00 $10.62 $0.62
Raw Materials $10.00 $7.32 $-2.684
Direct Labour $7.20 $4.20 $-3
Manufacturing Overhead $4.45 $10.62 $6.17
Total manufacturing cost / plate $21.65 $22.14 $0.48
The total manufacturing cost / plate is also higher than the standard value, with a variance of
0.48$. But this is a very small variance, hence the estimation is good
Calculating Revenue , Profit and Cost of Goods Sold
Standard Actual
Selling Price $27 $26.95
Units Sold 70000 60000
Revenue= Selling Price * Quantity Sold $18,90,000 $16,17,000.00
COGS $15,15,500 $13,28,323.64
Profit $3,74,500 $2,88,676
Finished Goods (6100 plates at $21.7/plate) $1,32,370 $1,32,370
Closing value of Finished Goods $1,32,370 $6,71,370.00
Raw Materials (36000 pounds at $2.5/pound) $90,000 $90,000
Closing Raw Material Inventory $2,90,000 $1,72,909
Balance Sheet for month end (Standard)
Assets
Raw Materials $2,90,000
Finished Goods (6100 plates at
$21.7/plate) $1,32,370
Other Assets $6,68,000
C&CE $6,00,000
Debtors $5,17,000
Total $22,07,370
Liabilities & Equity
Debt $3,70,500
Creditors $4,36,000
Accounts payable & accrued expenses $3,06,370
Other Liabilities $1,40,000
Capital Stock $1,20,000
Retained Earnings $4,60,000
Gross Profit $3,74,500
Total $22,07,370
Balance Sheet for month end (Actual)
Assets
Raw Materials $1,72,909
Finished Goods $6,71,370
Other Assets $6,68,000
C&CE $6,00,000
Debtors $2,17,000
Total $23,29,279
Liabilities & Equity
Debt $8,78,009
Creditors $1,36,000
Accounts payable & accrued expenses $3,06,370
Other Liabilities $1,40,000
Capital Stock $1,20,000
Retained Earnings $4,60,000
Gross Profit $2,88,900
Total $23,29,279
Difference between actual and standard = $23,29,279 - $22,07,370 = $1,21,909
From the above two balance sheets , it can be noticed that the actual Balance sheet for the end
of month has a higher value of assets , liabilities and equity by $1,21,909 , which shows that
the borrowings in the form of debt and creditors have exceeded the budgeted amount.
Profit and Loss Statement for the month
Standard Actual
Revenue $18,90,000 Revenue $16,17,000
COGS $15,15,500 COGS $13,28,100
Gross Profits $3,74,500 Gross Profits $2,88,900
Profit Margin 19.8% Profit Margin 17.9%
The difference in profits between actual and standard is $288900 - $374500 = - $ 85600
From all the above-mentioned calculations, it can be seen that the variance of standard values
from actual are significant, and the revenue and profit margins have been over-estimated.
Explain the differences between the two sets of financial statements. Which costing
method should Dang use and why?
The difference in variance is due to increase in cost of raw material , manufacturing cost per
unit and the quantity being produced. Standard method and actual method, both needs to be
used by Dang. This is because from the actual method, the actual performance of the firm can
be obtained and hence the right financial statements. Standard method helps in improved cost
control, and a firm can gain by setting standards for greater cost control, estimate each type of
cost incurred and then look at the exceptions or variances. Dang can hence use it for obtaining
the variance figure, and subsequently use it for managerial planning and decision making.
