Question

Liam is struggling to determine which deprecation method he should use for his new silk-screening machine. He expects sales to increase over the next five years. He also expects (hopes) that in two years he will need to buy a second silk-screening machine to keep up with the demand for products of his growing company. Discuss which depreciation method makes more sense for Liam:

• Higher expenses in the first few years, or keeping expenses consistent over time?
• Or would it be better for him to not think in terms of time, but rather in the usage of the machine?
• Please explain your choice.

Answer 1

>Here it won’t be a good option for Liam to use consistent expense method (or Straight Line Method) because most of the depreciation charge should be based when the machinery is new(e.g. machine values more in the initial years , because with passage of time, the value tends to decrease due to normal wear and tear, and availability of new technology in the market).
>So higher expenses in the first few years is a better depreciation method.
>But, since he expects that sales increases over the next 5 years, and he buys one more machinery to match the market demand , it is very much obvious that the machines will be used heavily later, and thus instead of thinking in terms of time he should think in terms of usage, because initially the machines will be used for a limited level of output, but the load will tend to increase after that, and that’s why the depreciation value of the machinery should be based on the usage instead of time.

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