Depreciation Costs

This represents the depreciation of equipment in time or according to the equipment wear. There are two types of depreciation:

Economic depreciation

This economic depreciation is determined from the value loss that originates from use. This value loss has to be estimated for each machine. For example, let’s assume that an installed machine has an initial value of $ 60 000 and that it can be used for 2 000 hours per year over five years (10 000 hours of work during its life time). The economic hourly depreciation rate can be computed as 60 000 / (5 x 2000) = $ 6. When dealing with economic depreciation, extensive repairs have to be taken into account.

Economic depreciation is the most representative measure for the true economic cost of manufacturing.

Fiscal Depreciation

Fiscal deprecation is calculated from fiscal rules. It directly influences the after tax-profit of the company and therefore the taxes that it pays. It is not necessary that this fiscal depreciation be linked with the economic cost of the machine.

Even if these two different available options are inducing different results, some depreciation costs have to be calculated to help to define the cost of manufactured and stored items. This cost will be taken into account in the determination of taxable income.

The calculation of the standard costs is actually based on economic depreciation.

In all cases, it is necessary to release depreciation to the operating machine hour.  All the work centers of the same cost center have the same depreciation rates. In order to estimate these rates, first the user computes the aggregate number of standard hours of operation (for all machines of the cost center) over the budgetary period (typically companies consider yearly periods or monthly periods). Then, one cumulates depreciation of the equipment which belong to the cost center over the same budgetary period. The ratio between the aggregate depreciation and the aggregate number of standard hours of operation will give the hourly depreciation rate for the cost center.

The depreciation cost associated to a routing operation is computed as the depreciation rate multiplied by the operation time.