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Accounting assigment (Depreciation Memo) - Assignment Example

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Due to the need for managerial analysis, the most suitable method would, therefore, be the straight line depreciation method. Although it may not give values that are closest to actual depreciation,…
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Accounting assigment (Depreciation Memo)
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Download file to see previous pages To get the depreciation amount, subtract the scrap value from the cost of the machine and then divide it by the useful life of the machine (Weil, Schipper, and Francis, 2012).
This method is simple to use. Its calculations are easy as the same amount of depreciation applies for each year. There is, therefore, no need for recalculating the value again unless there is a revaluation of the asset. It is also easy to forecast future income since you already know what your depreciation will be (Weil, Schipper, and Francis, 2012).
The method tends to ignore the fact that assets lose value faster during the first years of use. Since the method applies uniform depreciation on the asset throughout its life, it may give a higher book value than the actual value. In later years, the asset may seem to offer more value than it gives. That is if depreciation is to form the basis of the assessment.
Under this method, depreciation of an asset depends on the level of activity during that period. A period where the output level is high would record higher depreciation values comparative to years with low production. To get the amount of depreciation, divide the depreciable amount by the total expected units the machine would produce in its lifetime and then multiply the answer by the period’s production (Weil, Schipper, and Francis, 2012).
The units-of-production method produces the closest estimate of depreciation to actual depreciation. Since it uses activity level as a basis for determination of depreciation, it fairly allocates depreciation to the periods as per the usage of the asset. In so doing, it matches the depreciation expense to revenue generated by the asset.
In periods where there is no activity, there would be no depreciation. That is despite the fact that the asset would still lose value. The method may also not be applicable to assets whose relationship to production is not direct and hence will not depend on activity level. Assets such as ...Download file to see next pagesRead More
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