Cost Management
Chapter Two
Depreciation Analysis
Eng. Mahmoud Nassar
All Right Reserved - Mahmoud Nassar – 01019973993- [Link]@[Link]
Depreciation
Systematic allocation of an assets initial cost over its
depreciable life (loss in value).
Depreciation Terms:
Cost The price paid for the asset.
Useful life Number of years the asset is expected to be
used in business.
Salvage value Expected market value of the asset end
of its useful life.
Book value The asset’s original cost less accumulated
depreciation.
P: Present value
F: Future Value
n: Useful life
Depreciation
Methods of Depreciation:
1)Straight- Line Method.
2)Sum of year’s (SYD).
3)Declining Balance Method.
Depreciation
Straight Line Depreciation
Dt =
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐶𝑜𝑠𝑡 𝑃 −𝑆𝑎𝑙𝑣𝑎𝑔𝑒(𝐹)
𝑁𝑜.𝑜𝑓 𝑌𝑒𝑎𝑟(𝑁)
SLD
Example (1)
• A Company buys a large machine for 1$ Million, the
machine has useful life of ten years and is worth $ 100,000
at the end of its useful life
• Define the depreciation rate and the book value at the end
of each year.
Example (1) - Solution
Dt =
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐶𝑜𝑠𝑡 𝑃 −𝑆𝑎𝑙𝑣𝑎𝑔𝑒(𝐹)
𝑁𝑜.𝑜𝑓 𝑌𝑒𝑎𝑟(𝑁)
Dt = 1,000,000−100,000
10
= $ 90,000/year
Year Initial Cost Depreciation Book Value (BV)
0 1,000,000 0 1,000,000
1 90,000 910,000
2 90,000 820,000
3 90,000 730,000
4 90,000 640,000
5 90,000 550,000
6 90,000 460,000
--- -- --
--- -- --
10 90,000 100,000
SLD
Example (2)
• The initial cost of a new machine is $ 3,650 and it can be
depreciated over are covey period of 7 years, if the salve
value is 500 $ what is the uniform annual depreciation rate
and the different book value along the period of 7 years?
Example (2) - Solution
SLD
Example (3)
• An asset has a first cost of $ 38,000 a life expectancy of 10
years, and the estimate salvage value is $ 2,000 calculate
the depreciation charges by applying the modified SL
method and considering that 60% of total depreciation
occurs in the first 4 years of the life of the asset.
Example (3) - Solution
Depreciation
Sum of years Digits Method (SOYD) :
D=
𝑁−𝑡+1
𝑆𝑌𝐷
(P-F)
𝑁(𝑁+1)
where: SYD =
2
Example (4)
P =$ 10,000 n = 5 Years
F = $ 2,000
Example (4) - Solution
SOYD = 𝑛(𝑛+1)
2
30
= = 15
2
D=
𝑁−𝑡+1
𝑆𝑌𝐷
(P-F)
n Depreciation BV
1 (5Τ15)*8000 = 2,667 7,333
2 (4Τ15)*8000 = 2,133 5,200
3 (3Τ15)*8000 = 1,600 3,600
4 (2Τ15)*8000 = 1,067 2,533
5 (1Τ15)*8000 = 533 2,000
SLD
Example (5)
• The initial cost of a new machine is $ 3,650 and it can be
depreciated over are covey period of 7 years, if the salve
value is 500 $ what is the depreciation rate and the
different book value along the period of 7 years used SOY?
Example (5) - Solution
Depreciation
Declining – Balance Method :
Constant Ratio =
2
𝑛
Example (6)
P =$ 24,000 n = 5Years
F = $ 2,000
Example (6) - Solution
2 2
Ratio = = = (40%)
𝑛 5
Year BV Beginning Rate Annual Accum. Dep. BV Year
year Depreciation Year End End
1 24,000 0.4 9,600 9,600 14,400
2 14,400 0.4 5,760 15,360 8,640
3 8,640 0.4 3,456 18,816 5,184
4 5,184 0.4 2,074 20,890 3,110
5 3,110 0.4 1,244 22,134 2,000
Depreciation
Unit of production method :
Depreciation per unit =
𝑐𝑜𝑠𝑡−𝑠𝑎𝑙𝑣𝑒 𝑣𝑎𝑙𝑢𝑒
𝑡𝑜𝑡𝑎𝑙 𝑢𝑛𝑖𝑡 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛
Depreciation Expense = Depreciation per unit * Unit production
in period
Example (7)
A machine costing 42,000 will have a life of 5Years and salvage value of
3,000. it’s estimate that 10,000 unit will be product on this machine, first year
2,000; second year 2,400; third year 2,100; fourth year 1,800; fifth year
1,700 calculate the depreciation change basis of production.
Example (7) - Solution
Depreciation per unit =
42,000 −3,000
10,000
= 3.9 per unit.
D₁ = 2,000*3.9 = 7,800
D₂ = 2,400*3.9 = 9,360
D₃ = 2,100*3.9 = 8,190
D₄ = 1,800*3.9 = 7,020
D₅ = 1,700*3.9 = 6,630