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  Depreciation of Plant and Machinery

Introduction to Depreciation of plant and machinery

Depreciation implies decrease in the value of an asset since lapse of time, wear and tear and another contributory causes. In order to view the accurate cost of manufacture of an article the charge for depreciation may be takes into the cost accounts. It will be good to conserve a separate Plant and Machinery Register in order to protect a larger correctness in calculate the amount of reduction and giving thorough particulars about each one machine at one place.

 Appropriate determination of the amount of depreciation to be charged to production is really essential for ascertaining the true cost of a product. There are several methods of giving depreciation. Some of them are described as follow:

(a) Fixed instalment method:

In case of this technique a fixed amount through the way of depreciation is charged year after year. The amount of depreciation to be charged is determined through taking into consideration the original cost of the asset, its estimated scrap value and its supposed life. For instance, if a machine purchased for Rs. 10,000 it will have normal life of 10 years and realise Rs. 2,000 as scrap value, the yearly charge for depreciation will be Rs. 800 computed on the basis of following formula:

Depreciation = Original Cost - Estimated Scrap Value/ Normal Life of the Asset

It is to be noticed that the normal risk of obsolescence of the asset should also be considered when calculating the amount of depreciation. For instance, if in the above case it is supposed that only after 8 years the machine will turn into obsolete the normal life should be taken as 8 years even though the machine can be used for 10 years. So, technological life is more relevant.

(b) Machine-hour rate method:

This technique is identical to the first method with the only variation that in case of this technique the life of the asset is estimated in terms of hours. The total cost minus the estimated scrap value is divided from the number of hours and the hourly-rate of depreciation is acquired. If in the above illustration the total number of hours for all ten years is supposed to be 15,000, the hourly rate of depreciation will be

= 8,000/15000 or 53paiseper hour

Both these techniques have the benefits of charging similar amount of depreciation year after year. This is logical also since in terms of output the machine renders uniform service over its entire life. Except, in order to avoid the heavy burden of repairs and maintenance throughout the later years of plant's life it will be helpful to estimate the supposed amount of maintenance and repairs for the entire of the asset and then consistently distributing it over the estimated life of the asset.

(c) Diminishing balance method:

 In case of this technique depreciation is charged at a fixed rate on the reducing balance (that is cost less depreciation) every year. For instance, if an asset is purchased for Rs. 1,000 and depreciation is charged @ 1 0% pa. on the diminishing balance, the depreciation for the first year will be 10% p.a. on Rs 1,000 that is, Rs. 100, for the second year Rs. 90 (10% on Rs. 1,000 - Rs. 100), for the third year, Rs. 81 (10% on Rs. 900 - Rs. 90) and so on. In case of this technique the amount of depreciation will continue decreasing year after year.

As related to the straight line technique, the charge of depreciation within this method is more in the early years and less in later years. So, the cost of the product is escalated in the first few years of the purchase of the asset just through application of this technique.

(d) Replacement Cost Method:

Depreciation is charged on the replacement cost of the asset at a specific rate. This is prepared to give for the market value of the asset on the expiry of its helpful life and also to obtain the current costs of production into account.

In cost accounts the first two techniques are most generally used due to simplicity and convenience. Other techniques like group depreciation method, annuity method, depreciation fund method etc., are not much employed in cost accounts.

It may occur occasionally that the value of an asset is decreased to nil by charging depreciation throughout its effective life, but it still carries on being quite serviceable. This may be because of either due to excessive depreciation charged in the past or on account of excellent maintenance. In such type of case the problem is whether it will be advisable to charge any amount by way of depreciation if the asset is employed in production. It considers proper to charge a reasonable amount for depreciation in cost accounts in such type of case also since this is an abnormality, that in no way should influence the costing results or else they will be non-comparable. The amount of depreciation charged from production might be transferred to the costing profit and loss account just such as any other abnormal profit or loss. Though, in financial accounts no charge for depreciation might be made in such a case.

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