IV Definition-The Life of a Machine-Obsolescence-Other Depreciative Influences-The Accounting of Replacements-Charging Replacements to Capital-Depreciation Part of Producing Cost -Deterioration Other than Physical-A Necessary Item-The Depreciation Reserve-Difficulties in Determining the Rate of Depreciation-No General Rule Possible-Study of Individual Plant Necessary-Of Equal Importance with Other ChargesDepreciation Records-Verification-Five Methods of Calculation-Results-Charging Off Depreciation. T IV DEPRECIATION HE growth of the modern science of cost accounting, marvelous as it has been, has served, in great part, merely to refine and make more accurate methods and processes long existent. The determination of the cost of the labor and materials expended upon a given product has been arrived at in a more or less crude way ever since production on any but the most primitive scale began. There is one element of cost, however, whose inclusion in cost accounting may justly be credited entirely to the modern accountant, the element of "depreciation." Definition.-Depreciation is the shrinkage in the value of assets due to wear and tear, lapse of time, or obsolescence of type arising from the progress of new inventions. Before entering into the discussion of the subject it may be well to note the distinction between “depreciation" and "fluctuation." The former is an impairment of value which in the ordinary course may be expected to take place as the necessary consequence of the possession and enjoyment of an asset; the latter, however, arises from causes entirely outside the scope of the business and may affect the value of its assets adversely or favorably. A favorable fluctuation in the value of fixed assets seems to be proper subject for a secret reserve, such as an appreciation in the value of land upon which factory buildings are erected, but it is not a conservative policy to write up the book value under such circumstances; a favorable fluctuation in floating assets is temporarily a secret reserve which will be included in the trading profits when those assets are realized, but which should not be anticipated. An unfavorable fluctuation in fixed assets need not, under normal conditions, be charged against revenue before declaring dividends out of current profits. It may therefore be disregarded in the accounts, but in order that the true position of affairs may be placed before the owners, it is desirable that attention be called in the annual report to the shrinkage in value. An unfavorable fluctuation in floating assets may be disregarded as long as there is reason to believe it to be of temporary character, but if it seems likely that conditions will remain unfavorable until the time comes for realizing those assets, then the loss should be charged against the period in which it actually occurred, rather than against the period in which it was realized. In connection with this distinction between depreciation and fluctuation, it should be added that in some quarters the practice has been strongly advocated of occasionally having the fixed assets revalued as a check upon the annual provision for depreciation. There is much to be said in favor of revaluations, but it must be borne in mind that a revaluation can hardly fail to take into consideration fluctuation as well as depreciation, and consequently may introduce into the accounts a disturbing element, obscuring the real result of the operations of the business. The Life of a Machine. It is obvious to any one that if we take a "living" machine, as, for example, a horse, the value of that horse becomes continually smaller with advancing years. Given two horses with five years difference in age between them, but equal in all other respects, the younger one is worth more money; for barring accidents and extraordinary circumstances, it is practically certain that he will outlive the older. This is but another way of saying that a horse has a limited life and that, consequently, the more that period of life elapses, the less potentiality of usefulness the horse pos sesses, and the smaller becomes his value. In other words, a horse continually depreciates in value. A machine of any kind has just as definite a period of "life" as a horse, and consequently is quite as liable to depreciation in value. When we see a machine running to capacity day after day for months, turning out enormous quantities of product without any apparent loss of efficiency, it seldom strikes us that the machine is in any sense being used. But every machinist knows full well, and every observer must with but little thought realize, that a silent lessening of the value of the machine is going on day and night. It may not now be apparent to the eye, but a day will surely come, must inevitably come, when the machine must be abandoned, when further repairs upon it will be useless, and it will be reduced to its zero or residual value. It is sometimes argued that if machinery be maintained in perfect repair it does not depreciate, and that, so long as its output does not fall off in quality or quantity, it is as valuable to its owner when ten or twenty years old as when new. This, however, is absolutely incorrect, for although a machine could, of course, be kept "alive" forever, by renewing its parts one by one as they wore out, supposing that it never grew obsolete, its value at any given time would depend upon the state of deterioration of its various parts at that time, because the effluxion of the life of each part is proceeding steadily from day to day. The same conditions apply to buildings as well as machinery. Obsolescence.-There are, however, many ways other than physical deterioration by which a machine or building may become useless. Chief among these is what is often termed "obsolescence." A machine is said to have become obsolescent when an efficient or more economical machine is invented, making it uneconomical longer to use the old one. Innumerable instances could be given from almost any industry of expensive machines which became worthless soon after they were bought, owing to the invention of a much superior device. Especially is |