Cost sheet depreciation

The relationships among the various annual costs given by Eqs. (9-1) through (9-9) are illustrated diagrammaticaUy in Fig. 9-1. The top half of the diagram shows the tools of the accountant the bottom half, those of the engineer. The net annual cash flow Acp, which excludes any provision for balance-sheet depreciation Abd, is used in two of the more modern methods of profitability assessment the net-present-value (NPV) method and the discounted-cash-flow-rate-of-return (DCFRR) method. In both methods, depreciation is inherently taken care of by calculations which include capital recoveiy. 

The initial cost of the asset is shown as a fixed asset in the balance sheet. In the profit/loss account, the decrease in value is shown each year by allowing a proportion of the original value as a notional operating cost, the depreciation allowance . A correspondingly reduced asset value is then shown in the end-of-year balance sheet, with an equivalent increase in the cash assets (so that the total assets are not changed). 

Raw material costs should be estimated by direct computation from flow rates and material prices. The flow rates are deterrnined from flow sheet material balances. The unit prices are obtained from vendors, company purchasing departments, or the Chemical Marketing Reporter. For captive raw materials produced internally, a suitable transfer price must be estabHshed. Initial catalyst charges can be treated as a start-up expense, working capital component, or depreciable capital, depending on the expected catalyst life and cost. Makeup catalyst is frequendy treated as a raw material. 

Concept 4. Cost means that the assets are normally shown in the balance sheet at cost price together with their subsequent depreciation. Some assets such as land may be considerably more v uable than when originally purchased, but no indication of this is given in the balance sheet. However, some governments now require a note giving the current estimated value of the laud. 

Accountants regard assets as resources that have not yet been used up. Assets are normally shown on the balance sheet at cost minus accumulated depreciation. In this sense, the depreciation charge for an accounting period is the means of converting a part of an asset into a current expenditure that is then listed as an expense in the income statement. 

The reconciliation between the cash flow statement and the income and expense statement is as follows. Start with the 40,000 from the last line in the cash flow statement, subtract 20,000 for the depreciation expense, and add back the 30,000 mortgage loan principal payment (not an allowed expense). The result is the net after-tax earnings. Figure B.ll is a set of statements from a small oil company. The statement of operations lists revenue and expenses, whereas the balance sheet lists various assets, liabilities, and stockholders equity ( net worth ). So-called capital items such as buildings, equipment, oil and gas property, and various intangibles are assets. Operating costs are deductions from revenues for operations not including expenditures for capital items. 

The net cash flow into the project each year is made up of two items the PAT and the depreciation allowance for that year. The depreciation is added to the PAT because, unlike all the other costs, it does not actually leave the balance sheet. 

A balance sheet applies only at one specific time, and any additional transactions cause it to become obsolete. Most of the changes that occur in the balance sheet are due to revenue received from the sale of goods or services and costs incurred in the production and sale of the goods or services. Income-sheet accounts of all income and expense items, such as sales, purchases, depreciation, wages, salaries, taxes, and insurance, are maintained, and these accounts are summarized periodically in income statements. 

The cost of manufacturing thermoformed, polystyrene foam sheet parts is less dependent on raw material cost than other extrusion processes. This is largely due to the combined effects of additional energy costs required to operate two extruders, heat removal requirements in the secondary extruder, cost of pelletizing (densifying) regrind and the relatively low output of the process for the equipment scale and cost. Typical cost factors for the manufacture of thermoformed polystyrene foam sheet products include raw materials 35%, labor 27%, sales and administration 16%, depreciation 8%, utilities 7% and other 7%. 

Depreciation methods in use today are either straight-line or accelerated. In the fomier method, the cost of an asset is divided by the asset s life. For example, if an equipment item cost 7000 and its life is 7 years, then 1000 per year for 7 years is charged as the depreciation charge on the operating expense sheet. 

Chuck Adamson built a new indigo plant at a cost of 2 million to capitalize on the worldwide craze for blue denim. He managed to convince the IRS that the craze would last only two years so that he should be able to depreciate the plant in 2 years by straight line, even though the plant will physically last 15 years. Let s assume the blue denim craze continued strongly into the third year. Will Adamson operate without a plant listed on the balance sheet Will he have no capital depreciation expenses on his product cost Can he undersell any would-be newcomers into the market ... 

Depreciation is the cost item that reflects CAPEX and usually represents about 10% of the invested capital. The book value of fixed assets decreases year over year in the balance sheet of a company. 

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