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 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: 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 $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:

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.

Liabilities and Equity

Accounts payable and accrued expenses $170,370

Other liabilities 140,000

Capital stock 120,000

Retained earnings 460,000

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.

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):

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.

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.

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 finished-goods inventories reflect standard costs.

Question to be answered: Explain the differences between the two sets of financial statements. Which costing method should Dang use? Why?