Accounting for Depreciation as a Production Cost 290070

IF the costs of almost any group of manufacturers who market the same product are analyzed, two kinds of differences will be detected, according to the author. The real differences in costs arise from superior management, higher productivity, and better disposition and utilization of capital. The accidental differences result from the failure of manufacturers to include in cost records all of the proper legitimate items of expense.
Confining his treatment of the subject to an analysis of the depreciation of plant and equipment, the author states that depreciation is a decline in the value which is certain to occur as a result of wear and tear and gradual obsolescence. It is caused by the possession and use of an asset, and is therefore a part of the cost of production. The accountant attempts to recover depreciation loss in the value of the capital assets by charging it into the cost of production. This cost must be collected as the product is sold, and the primary questions are the determination of the proper charge as to the amount of depreciation and to how to charge it.
Engineers must predict the useful economic life of a plant or equipment from a painstaking, intelligent estimate backed by the experience of the estimator and the trade in general, since there is no standard rate of depreciation for all businesses or for like equipment used in the same line of business. Since it is much safer to have the property outlive the estimated life than to have its usefulness terminate before its cost has been written off, the author advises that estimators be conservative when calculating the useful life of property.
Having established a reasonable useful economic life for each class of plant or equipment, it is then necessary to determine a method of calculating the costs and of applying the results to production. The paper outlines the various methods in use, recommends that permanent records be kept of all assets, and states that a suitable classification of property is a prerequisite for the correct recording of depreciation. An accurate record of depreciation requires that the specific items and units of property be enumerated and classified by kind, group or department, and that their original cost be ascertained as well as their accumulated depreciation and remaining term of useful life.
Other subjects covered by the author include details of proper charges, depreciation on original replacement cost, reserve fund for replacements, the budget system, and a statement of six rules for making charges on account of depreciation.


Subscribers can view annotate, and download all of SAE's content. Learn More »


Members save up to 43% off list price.
Login to see discount.
Special Offer: With TechSelect, you decide what SAE Technical Papers you need, when you need them, and how much you want to pay.