Depreciation cost definition

The extent of maintenance and repairs may have an effect on depreciation cost, because the useful life of any property ought to be increased if it is kept in good condition. However, a definite distinction should always be made between costs for depreciation and costs for maintenance and repairs. 

Static and Flexible Budgets Overhead cost can significantly affect the profitability of a projec t and is the only cost outside the control of the project manager. The project is expected to contribute a definite amount toward the expenses of the company and will be charged this amount even if the production rate is zero. This is the fixecTcomponent of the overhead cost and will include directly allocable costs such as depreciation and a proportion of general costs such as office salaries and heating. 

The Canadian Income Tax Act IT-285R2 dated March 31, 1994 gives some general definitions and remarks on depreciation of property and capital cost allowance. Schedule II lists the types of property divided into classes, percentage depreciation and description of the property. Some examples are given in Table 5.4. 

A major source of new capital is from internal capital, including, primarily, undistributed profits and depreciation funds. Since this definitely is owned capital, it is not necessary to consider interest as a cost. However, some concerns prefer to assign a cost to this type of capital, particularly if comparisons of alternative investments are to be made. The reasoning here is that the owned capital could be loaned out or put into other ventures to give a definite return. 

Income-tax effects can be included properly in all the profitability methods discussed in this chapter by using appropriate definitions of terms, such as those presented in Table 4. The methods of discounted-cash-flow rate of return and present worth are limited to consideration of cash income and cash outgo over the life of the project. Thus, depreciation, as a cost, does not enter directly into the calculations except as it may affect income taxes. 

To calculate several of the cost items listed in Table 2.1, requires the depreciable and fixed capital costs. The depreciable capital cost is the capital required for equipment and its installation or modification in the process, and all the facilities required to operate the process. There is some variation in the definition of fixed capital cost. References [1-5], define the fixed capital as consisting of the depreciable capital cost, land cost, and site or land development cost. Woods [10], however, omits land cost and land development cost so that that the fixed capital cost equals the depreciable capital cost. We will adopt the first definition here. For now, assume that we know the depreciable capital cost. We will develop a procedure for its evaluation later. In Example 2.1 estimate the production cost using Table 2.1. 

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