The Itty-Bitty Machine Corporation (IBM) is a company that manufactures microprocessors and other computer chips. IBM uses process costing. Direct materials are added at the beginning of the manufacturing process; conversion costs are added evenly throughout production. A normal rate of spoilage for this manufacturing process is 15%. Data for the month of October is as follows:

Physical Direct Conversion

Units Materials Costs

Work in process inventory: 400 $76,800 $12,240

Units started during the month 1,700

Units completed and transferred to finished goods 1,400

Ending work in process inventory (units) 300

Cost of direct materials added during the month $453,600

Cost of conversion during the month $194,320

The work in process inventory on September 30 was 100% complete for raw materials, and 30% complete for conversion costs. The work in process inventory at the end of October was 100% complete for raw materials, but only 40% complete for conversion costs.

REQUIRED:

1. Allocate the costs for the month of October, using the weighted-average method of process costing. (13 Marks)

2. Prepare the journal entries to record the following transactions for the month of October:

1. Raw material (from inventory) added to production during the month. (1 Mark)
2. Completed product transferred to finished goods inventory. (1 Mark)

3. Disregard your answer to a). Assume instead that IBM uses the First-In, First-Out (FIFO) method of process costing. Compute the equivalent units (EU) for the month of October, and allocate the costs for the month of October using FIFO. (14 Marks)

4. Prepare the journal entries to record the following transactions for the month of October:

1. Conversion costs added to production during the month. (1 Mark)
2. Completed product transferred to finished goods inventory. (1 Mark)

5. Disregard your answer to c). Assume that IBM uses the standard cost method of process costing, and that standard costs are $245 per unit for materials and $95 per unit for conversion costs. Using the equivalent units you computed in b), allocate the costs for the month of October. Calculate the variances for direct materials and conversion costs for the month of October. (5 Marks)

6. Comment on the variances in e) above. What factors/events could have caused the variances for raw materials and conversion costs? Provide two possible explanations for each variance. (4 Marks)