Depreciation

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Depreciation

© All Rights Reserved

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BREAK EVEN ANALYSIS

Break even Analysis

Break even analysis

- is used to determine the break even cost,

which is the cost at which the total income

is exactly equal to the total expenses

incurred in the business.

Break-Even Chart

50,000

Revenue

40,000

Break-even

point Total

30,000

costs

Dollars

20,000

Fixed costs

10,000

| | | | | |

0 2,000 4,000 6,000 8,000 10,000

Units

Break-Even Analysis

BEPx = break-even point in x = number of units produced

units

BEP$ = break-even point in TR = total revenue = Px

dollars F = fixed costs

P = price per unit (after all V = variable cost per unit

discounts) TC = total costs = F + Vx

when

TR = TC F

or BEPx =

P-V

Px = F + Vx

Break-Even Analysis

BEPx = break-even point in x = number of units produced

units

BEP$ = break-even point in TR = total revenue = Px

dollars F = fixed costs

P = price per unit (after all V = variable cost per unit

discounts) TC = total costs = F + Vx

BEP$ = BEPx P

= F P Profit = TR - TC

P-V = Px - (F + Vx)

= F

= Px - F - Vx

(P - V)/P

F = (P - V)x - F

=

1 - V/P

Example 1.0

A manufacturer produces certain items at

a labor cost of P115 each, material cost

P76 each and variable cost of P2.32 each.

If the item has a unit price of P600. how

many number of units must be

manufactured each month for the

manufacturer to break even if the monthly

overhead is P428,000

Example 2.0

A company which manufactures electric

motors has a production capacity of 200

motors a month. The variable cost are

P150.00 per motor. The average selling

price of the motors is P275.00. Fixed cost

of the company amount to P20,000 per

month which includes taxes. Find the

number of motors that must be sold each

month to break even.

Example 3.0

A factory engaged in the fabrication of an

automobile part with a production capacity of

700,000 units per year is only operating at 62%

of capacity due to unavailability of the necessary

foreign currency to finance the importation of

their raw materials. The annual income is

P430,000.00. Annual fixed cost are P190,000.00

and variable cost are P0.348 per unit

What is the current profit or loss?

What is the break even point?

Example 4.0

The Asian Transmission Co. makes and

sell certain automotive parts. Present

sales volume is 500,000 units per year at

a selling price of P0.50 per unit. Fixed

expenses total P80,000 per year.

What is the present total profit for a year

What is the present break even point in pesos

and in units.

Example 5.0

The following data for year 2000 are available for

Cagayan Automotive Company which manufactures and

sell a single automotive product line.

Unit selling price P40.00

Unit variable cost P20.00

Unit contribution margin P20.00

Total Fixed Cost P200,000.00

What is the breakeven point in units for the current year?

DEPRECIATION

Depreciation

Depreciation

Is the reduction of fall in the value of an asset

or physical property during the course of its

working life and due to the passage of time

Types of Depreciation

Physical Depreciation

Is due to the reduction of the physical ability

of an equipment or asset to produce result.

Functional Depreciation

Is due to the reduction in the demand for the

function that the equipment or asset was

designed to render. This type of depreciation

is often called obsolescence.

Methods of Computing Depreciation

In this method of computing depreciation, it is

assumed that the loss in value is directly

proportional to the age of the equipment or

asset.

Formula Straight line method

d = Co - Cn

n

Where:

Co = first cost

Cn = cost after n years (salvage/scrap value)

Book value at the end of m years of using, Cm

Cm = Co Dm

Where: Dm = total depreciation after m years

Dm = d(m)

Sinking Fund Method

In this method of computing depreciation, it is

assumed that sinking fund is established in

which funds will accumulate for replacement

purposes

Formula Sinking Fund

Annual depreciation charge, d

d = (Co Cn)i

n

(1 + i) 1

Where:

Co = first cost

Cn = cost after n years (SV)

n = life of the property

Cm = Co Dm

Where: Dm = total depreciation after m years

n

Dm = d[(1+i) - 1]

i

Declining Balance Method

In this method of computing depreciation, it

is assumed that the annual cost of

depreciation is fixed percentage of the book

value at the beginning of the year. This

method is sometimes known as constant

percentage method or the Matheson

Formula

Formula Double Balance Method

m

k = 1 n Cn Book Value = FC (1-k)

m years

k = 1 m Cm m -1

d = (FC)(1-k) k

Co

Note: the value of k is the constant percentage. Hence k

must be decimal and a value less than 1. In this method,

salvage or scrap value must not be zero.

Sum of Years Digit (SYD) Method

First year d1 = (Co Cn) n

years

- Second year d2 = (Co Cn) n-1

years

years

Book value at the end of m years of using, Cm

Cm = Co (d1 + d2 ++dm)

Sum of years digit

years = n(n+1)

2

Double Declining Balance Method

year is a constant ratio of the book value

at the beginning of the year.

Formula:

k = 2/n

m

Book value = (FC)(1-k)

m-1

Depreciation = (FC)(1-k) (k)

Service Output Method

In this method it is assumed that the total

depreciation that has taken place is

directly proportional to the quantity of the

output of the property up to the time.

Formula Service Output Method

d1 = Co Cn

T

Depreciation charge during m year

Where:

Dm = Qmd1 T = total units of output produced

= (Co Cn)Qm M = age in years of the property at any

time

T Qm = total units of output during year m

Dm = depreciation charge during year m

Co = original cost of the property

Cn = book value at the end of life, n years

Working Hours or Machine Hour

Method

Formula

Total number of hrs

Example 1.0

In order to established the comparison between the

depreciation methods mentioned above, let us consider

the following data:

First cost (Co) = P10,000

Salvage value, Cn = P500

Life of property = 5 years

Solve using the Straight line method, Sinking Fund at 10%,

Matheson Formula and SYD method

Example 2.0

A certain company makes it the policy that

for any new piece of equipment that

annual depreciation cost should not

exceed 10% of the original cost at any

time with no salvage value or scrap value.

Determine the length of service life

necessary if the depreciation method used

is (a) the straight line formula (b) sinking

fund at 8% ( c) SYD method

Straight line Method

A machine has an initial cost of P50,000

and a salvage value of P10,000 after 10

years. What is the book value after 5 years

using straight line depreciation.

Straight line Method

An asset is purchased for P500,000. the

salvage value in 25 years is P100,000.

what is the total depreciation in the first

three years using SLM

Straight line Method

A manufacturing plant was built at a cost

of P5M and is estimated to have a life of

20 years with a salvage value of P1M. A

certain equipment worth P570,000 was

installed at a cost of P80,000 is expected

to operate economically for 15 years with

a salvage value of P50,000. Determine the

book value of the plant and equipment

after ten years, Use Straight line method

Straight line Method

The cost of the printing equipment is

P500,000 and cost of handling and

installation is P30,000. if the book value of

the equipment at the end of the 3rd year is

P242,000 and the life of the equipment is

assumed to be 5 years, determine the

salvage value of this equipment at the end

of 5 years

Sinking Fund Method

A plant erected to manufacture socks has

a first cost of P10,000,000 with an

estimated salvage value of P100,000 at

the end of 25 years. Find the appraised

value using sinking fund method assuming

an interest of 6% at the end of 10 years

and 20 years

Sum of Years Digit Method

A company purchases an asset for

P10,000 and plans to keep it for 20 years.

If the salvage value is zero at the end of

20th year. What is the depreciation in the

third year? Use SYD method

Sum of Years Digit Method

ABC Corporation makes its policy that for

every new equipment purchased, the

annual depreciation cost should not

exceed 20% of the first cost at any time

without salvage value. Determine the

length of service if the depreciation used is

the SYD method

Declining Balance Method

A machine cost P7350 has a life of 8 years

and has a salvage value of P350 at the

end of 8 years. Determine its book value

at the end of 4 years using Declining

balance method

Declining Balanced Method

The original cost of a certain machine is

P150,000 has a life of 8 years with a

salvage value of P9,000. how much is the

depreciation on the 5th year, using

declining balanced method

Declining Balanced Method

A machine costing P720,000 is estimated

to have a book value of P40,545.73 when

retired at the end of 10 years. Depreciation

cost is computed using a constant

percentage of the declining book value.

What is the annual rate of depreciation in

%?

Double Declining Balanced Method

Erectors Co. owns earth moving

equipment that cost P90,000. After 8 years

it will have estimated salvage value of

P18,000. compute the depreciation charge

using double declining balanced method

for 1st two years and book value at the of 5

years.

Working Hours Method

A lathe machine costs P300,000 (brand

new) with a salvage value of P15,000 is

expected to last for 28500 hours in a

period of 5 ears. In the first year of

service it was used for 8000 hrs.

compute the depreciation for the 1st year

and book value at the end of the first

year.

Service Output Method

A certain machine cost P40,000 and has a

life of 4 years and salvage value of

P5,000. the production output of this

machine in units per year for first year,

1800 units, second year 2200 units, third

year 3,000 units, fourth year 4,000 units. If

the units produced are of uniform quality,

what are the annual depreciation charges?

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