Depreciation & Inventory Management Accounting - Dr. Varadraj - - PowerPoint PPT Presentation

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Depreciation & Inventory Management Accounting - Dr. Varadraj - - PowerPoint PPT Presentation

Sep 21, 2023 461 likes •849 views

Depreciation & Inventory Management Accounting - Dr. Varadraj Bapat, IIT Mumbai 1 Concept of Conservatism Depreciation and other Provisions Management Accounting - Dr. Varadraj Bapat, IIT Mumbai 2 For conservatism, there should

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Depreciation & Inventory

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 Concept of Conservatism  Depreciation and other

Provisions

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For conservatism, there should be three qualitative characteristics, namely

 Prudence, i.e., judgment about

possible losses which are to be guarded, as well as gains which are uncertain.

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1) Straight Line method (SLM) 2) Reducing Balance Method RBM 3) Machine Hour Method 4) Production Units Method

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SLM: The underlying assumption

  • f

this method is that the particular asset generates equal utility during its lifetime.

Depreciation= Cost of Asset- Scrap Value Useful Life

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Example Cost of machinery: 18000 Installation Charges:2000 Useful Life of Asset: 5 Years Calculate Depreciation as per SLM

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Under this method, a fixed percentage of diminishing value

  • f the asset is written off each
  • year. The annual charges of the

depreciation decrease from year to year.

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Written Down Value (WDV)= (Acquisition Cost – Depreciation) Depreciation= WDV*Depr Rate

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Example Cost of machinery: 50000 Scrap Value of machine:5000 Useful Life of Asset: 10 Years Depreciation %: 15% p.a.

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RBM: For First Year Depreciation=50000* 15% =7500 For Second Year Depreciation=42500 * 15% =6375

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Where it is possible to keep a record of the actual running hours

  • f

each machine, depreciation may be calculated

  • n

the basis

  • f

hours worked.

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Example Cost of machine: 500000 Estimated working hours: 40000 Scrap Value: 10000 The pattern

  • f

distribution

  • f

effective working hours:

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Year hours 1-2: 5000 per year 3-5: 7000 per year 6-8: 3000 per year Compute depreciation p.a.

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Solution: 1-2 5000 X (500000-10000) 40000 =61250 p.a.

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Solution: 3-5 7000 X (500000-10000) 40000 =85750 p.a.

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Solution: 6-8 3000 X (500000-10000) 40000 =36750 p.a.

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Under this method depreciation is determined by comparing annual production with the estimated total production.

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