You are the Financial Controller for Lukes' Manufacturing and you have been approached by the Chief Executive Officer in relation to the purchase of a new item of equipment. Not having an accounting background, the owner Joe Logs, does not understand the concept of depreciation and is under the impression that depreciation is a process of creating a cash fund to replace an asset.
Write a note explaining the concept and using the information regarding the asset below illustrate the difference in various depreciation methods and the effect on the financial performance of the organisation if any.
Machine Cost $45,000
Delivery to site $500
Cost of set up ready for production $2,500
Salvage value estimated to be $3,000
Maximum units of production 5,000 in the first year
4,500 in the second year
And reducing by 500 units each until the end of its useful life
Effective Useful life 5 years
Show all calculations and a depreciation schedule in your report to demonstrate fully the impact to Joe Logs.