Causes of Depreciation

The other cause of depreciation is physical decay, accidents, deferred maintenance and neglect, inadequacy etc.

For further understanding, depreciation can be classified as under:

Causes of Depreciation

Now, each type is explained in the short below:

Depreciation due to Wear and Tear

Everybody knows that when any machine performs work, wear and tear certain components take place, although sufficient precautions are taken, i.e. proper lubricating and cooling is done, which minimizes wear and tear but it cannot be totally prevented. Hence the cost of replacement because of this cause is the value of depreciation due to wear and tear.


    


Depreciation due to Physical Decay

There are certain items in a factory, such as, insulation of material, furniture, electric cables, poles, building, chemicals and vessels etc., which get decay, because of climatic and atmospheric effect, with the result the value of these articles goes on reducing with the lapse of time. Although every effort is made by the owner to keep them in serviceable condition, even then because of climatic and atmospheric effect, there will be reduction in their value. This reduction in value is depreciation due to physical decay.

Accidental Depreciation

Although the machine might have installed even few days back and sufficient care is taken to prevent accident, even then, accident may occur due to some wrong operation, or some loose component or some other cause, which may result in a heavy damage. The depreciation in machine caused due to this reason is called accidental depreciation.

Now-a-days, to cover this risk, most of the owner get their equipment insured with the insurance companies, for which owners have to pay certain premium yearly. This amount of premium depends upon the estimated cost and life of equipment.

Depreciation due to Deferred Maintenance and Neglect

Every manufacturer supplies certain instructions for the smooth and efficient running of equipment. For example, in the case of a vehicle, a manufacturer gave the following instructions:

(i) Lubricating oil of particular grade should be used in engine.
(ii) Oil should be drained and new oil should be refilled after 4000km running.
(iii) All the bolts and nuts should be retightening after 5000km running.
(iv) Decarburizing after 30,000km running, and so on.

If these instruction are not properly followed because of neglect, and if proper maintenance is not done as recommended by manufacturer, then the value of vehicle may be reduced, and depreciation value because of this, is called 'depreciation due to deferred maintenance and neglect'.




Next Chapters

Estimating Procedure
Costing
Difference between Estimating & Costing
Depreciation & Obsolescence
Material Cost Calculation
Calculating Labor Cost
Direct and Indirect Expenses
Component Cost
Machine Shop Estimating
Forging and Forging Types
Starting an Organization
Welding Cost Estimation
Jigs and Fixtures
Forecasting
Qualities of an Entrepreneur
Starting Small Scale Industries
Budget and Budgetary Control
Supply & Law of Supply
Exchange and Barter Exchange
Classification of Market
Money and Types of Money
Trade Cycle
Break Even Analysis
Financial Management
Profit
Pricing
 


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