Depreciation Tax Shield [LO 4] AE9-11 Strauss Corporation is making a $70,000 in

Question

Depreciation Tax Shield [LO 4] AE9-11

Strauss Corporation is making a $70,000 investment in equipment with a 5-year life. The company uses the straight-line method of depreciation and has a tax rate of 40 percent. The company’s required rate of return is 11 percent.

What is the present value of the tax savings related to depreciation of the equipment? (Round the present value factor calculations to 4 decimal places, e.g. 0.2525. Round all other calculations and the final answer to 2 decimal places, e.g. 25.21.)

Present Value $ __________



Calculating Labor and Overhead Variances [LO 3,4]

At the start of 2012, Textile Express Company determined its standard labor cost to be 2.5 hours per unit at $33.90 per hour. The budget for variable overhead was $8 per unit, and budgeted fixed overhead was $15,000 for the year. Expected annual production was 5,000 units. During 2012, the actual cost of labor was $34.30 per hour. Textile Express produced 4,840 units requiring 11,700 direct labor hours. Actual overhead for the year was $50,290.

Calculate labor rate and efficiency variances and the controllable overhead variance and the overhead volume variance. (Round calculations to 2 decimal places, e.g. 25.21 and the final answers to 0 decimal places, e.g. 5,250. For negative numbers use either a negative sign preceding the number, e.g. -45 or parenthesis, e.g. (45).)

Labor Rate Variance = $_________ unfavorable
Labor Efficiency Variance = $ __________ favorable
Controllable Overhead Variance = $ ________ favorable
Overhead Volume Variance = $ _________ unfavorable

Explanation / Answer

1. Annual depreciation $70,000 ÷ 5 years $14,000.00 Annual tax savings $14,000 *0.40 $5,600.00 Present value of $5,600 per year for 5 years at 11% $5,600 * 3.6959 = $20,697.02.........................Ans 2. Std Lab cost per hr= $33.90 Budget VarOH pu = $8.0 Budget Fixed OH = $15000 pa Annual Prod = 5000 units = 5000*2.5 DIr Lab Hrs = 12500 DL Hrs Standard overhead rate is computed as follows: Total factory overhead / Direct labor hours = $15000/12500 =$1.20 per Std DL Hr...(1) Budget Var OH = No of Units * Bud Var OH pu = 5000*$8 = $40,000 Budget Var OH per DL Hr = $40000/12500 = $3.20 per Std DL hr....(2) So Total factory overhead rate at std prodn = (1)+(2) = $1.20+$3.20 =$4.40.......(3) Actual cost of labor =$34.30 per hour Actual Prod =4,840 units Actual DL Hrs =11,700. Actual overhead =$50,290 Calculation of Controllable variance: Actual factory overhead $50,290 less : Budgeted allowance based on standard hours allowed: Fixed expenses budgeted $15,000 Variable OH (12500 std hrs allowed × $3.20 Var OH rate) $40,000 ---------------------------------------------------------------------------------- Controllable variance $4,710 Fav. ===================================================== Possible reasons / causes for the unfavorable controllable variance are: 1. Indirect materials were purchased from a different supplier with higher costs. 2. More Indirect materials were used due to waste. 3. Indirect labor rates were higher due to a change in personnel or higher negotiated raises than budgeted. 4. Fixed overhead costs were more than budgeted. Factory overhead volume variance = Budgeted allowance based on standard hours allowed – Overhead charged to production is Factory OH Var = [Budgeted fixed expenses + variable expenses (ie standard hours allowed for actual production × variable overhead rate)] - (Standard hours allowed × Standard overhead rate) Calculation of factory overhead volume variance: Budgeted allowance based on standard hours allowed: Fixed expenses budgeted $15,000 Variable expenses (12500 standard hours allowed × $3.20 variable overhead rate) $40,000 ------------------------------ Total Budgeted ALlow on Std hrs = $55,000 Less : Overhead charged to production (4840Units *2.5 DL pu=12100 DL hrs)*$4.40 Total Fact OH Rate =$53,240 ------------------------------------------ Unfavorable volume variance $1,760 Unfav. ====== Labor rate variance = (Actual hours worked × Actual rate) - (Actual hours worked × Standard rate) = (11700*$34.30) - (11700*$33.90) = $4680 Unfav Labor efficiency variance = (Actual hours worked × Standard rate) - (Standard hours allowed × Standard rate) = (11700*$33.90) - (12500*$33.90) = $27,120 fav

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