The Amount of Depreciation For a Period

The amount of depreciation for a period and relating to a department is specifically allocated and booked to the standing order numbers. Separate standing order with suitable sub- numbers may be used to indicate the section number where the asset is located and to book depreciation for various types of assets like plant and machinery, building etc. Depreciation should be estimated in advance if it is charged on the basis of predetermined overhead rates. Generally, depreciation can be directly allocated to various departments or cost centers but where it is not possible it may be apportioned on the basis of value, floor space, or cubic capacity of the building in each department in case of building and on the basis of written down value of the assets in each cost center in case of plant and machinery.

Time factor or usage factor or inclusion of maintenance cost or an element of interests is the general principle which is taken into consideration while calculating depreciation for the purpose of charge to cost. Name of the asset and the use to which it is put to in a particular concern will determine the method to be selected for depreciation of an asset.

The various reasons for including the depreciation charge in the cost account are:

• To ascertain the true and comparable cost of production
• To show a true and fair picture in the balance sheet
• To keep the asset intact by distributing the loss in its value over a number of years.
• To keep the capital intact and to make a provision for the replacement of the asset in future.
• To provide for depreciation before distribution of profit as required under the companies Act.
• To provide depreciation in those concerns where selling price is directly related to cost.