In our 1a and 1b financial accounting courses, we learned how retailers, such as Wal-Mart, account for the cost of equipment that lasts more than one year. Recall that the equipment was recorded as an asset when purchased, and then it was depreciated over its expected useful life.
The depreciation charge reduced the company's assets and increased its expenses. This approach was justified under the matching principle, which seeks to recognize costs as expenses in the same period that the cost (resource) is used to generate revenue.
As we discussed in this week 1 class session, in managerial /cost accounting courses, the focus will often be on manufacturing entities, so please consider the following scenario:
Black & Decker (B&D) manufactures cordless hedge trimmers that it sells to Wal-Mart. In order to produce that, B&D had to purchase a robotic machine that it can be used to produce 1 million hedge trimmers.
Do you think B&D should account for depreciation on its manufacturing equipment the same way Wal-Mart accounts for depreciation on its registers at the checkout counters?
If not, how should B&D account for its depreciation? Please remember the matching principle when thinking of your answer.