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

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 be three qualitative characteristics, namely  Prudence, i.e., judgment about possible losses which are to be guarded, as well as gains which are uncertain. Management Accounting - Dr. Varadraj Bapat, IIT Mumbai 6

1) Straight Line method (SLM) 2) Reducing Balance Method RBM 3) Machine Hour Method 4) Production Units Method Management Accounting - Dr. Varadraj Bapat, IIT Mumbai 16

SLM: The underlying assumption of this method is that the particular asset generates equal utility during its lifetime. Cost of Asset- Scrap Value Depreciation= Useful Life Management Accounting - Dr. Varadraj Bapat, IIT Mumbai 18

Example Cost of machinery: 18000 Installation Charges:2000 Useful Life of Asset: 5 Years Calculate Depreciation as per SLM Management Accounting - Dr. Varadraj Bapat, IIT Mumbai 19

Under this method, a fixed percentage of diminishing value of the asset is written off each year. The annual charges of the depreciation decrease from year to year. Management Accounting - Dr. Varadraj Bapat, IIT Mumbai 21

Written Down Value (WDV)= (Acquisition Cost – Depreciation) Depreciation= WDV*Depr Rate Management Accounting - Dr. Varadraj Bapat, IIT Mumbai 22

Example Cost of machinery: 50000 Scrap Value of machine:5000 Useful Life of Asset: 10 Years Depreciation %: 15% p.a. Management Accounting - Dr. Varadraj Bapat, IIT Mumbai 25

RBM: For First Year Depreciation=50000* 15% =7500 For Second Year Depreciation=42500 * 15% =6375 Management Accounting - Dr. Varadraj Bapat, IIT Mumbai 27

Where it is possible to keep a record of the actual running hours of each machine, depreciation may be calculated on the basis of hours worked. Management Accounting - Dr. Varadraj Bapat, IIT Mumbai 28

Example Cost of machine: 500000 Estimated working hours: 40000 Scrap Value: 10000 The pattern of distribution of effective working hours: Management Accounting - Dr. Varadraj Bapat, IIT Mumbai 31

Year hours 1-2: 5000 per year 3-5: 7000 per year 6-8: 3000 per year Compute depreciation p.a. Management Accounting - Dr. Varadraj Bapat, IIT Mumbai 32

Solution: 1-2 5000 X (500000-10000) 40000 =61250 p.a. Management Accounting - Dr. Varadraj Bapat, IIT Mumbai 33

Solution: 3-5 7000 X (500000-10000) 40000 =85750 p.a. Management Accounting - Dr. Varadraj Bapat, IIT Mumbai 34

Solution: 6-8 3000 X (500000-10000) 40000 =36750 p.a. Management Accounting - Dr. Varadraj Bapat, IIT Mumbai 35

Under this method depreciation is determined by comparing annual production with the estimated total production. Management Accounting - Dr. Varadraj Bapat, IIT Mumbai 36