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Accounting theory and practice, Volume 2 (of 3) : a textbook for colleges and…

1. PROPORTIONAL METHODS

1089 words  |  Chapter 62

(a) Straight Line Method The straight line method is, first of all, simple in application and can easily be adapted to any asset under almost any conditions. Partly because of the ease of calculation and application, it has been designated as an official method by many regulatory boards. Its basis is a time basis and it spreads the charge evenly over the periods of the service life of the asset. Accordingly, where the time elements of depreciation, viz., decrepitude, inadequacy, or obsolescence, control and where the output does not fluctuate much from period to period, the straight line method should give satisfactory results for its intended purpose, i.e., for allocating the real depreciation charge. Its effect, however, must be considered also in conjunction with the distribution of the other costs connected with the asset. Many engineers maintain that repairs are light during the early life of an asset and heavy during the later years. If this is true and these costs are charged to the period in which they are incurred, the combined depreciation and up-keep costs place an unjustly heavy burden on the output of the later years. Almost equally good authority maintains that the cost of repairs is in no sense uniformly graduated as implied above but can be counted upon in practice to be extremely irregular. If this is true and up-keep costs are charged as above, then many periods are apt to be underburdened and others loaded too heavily. While, however, these considerations must be given weight when a single asset is under view, in a large plant after operation has continued to the point where a normal and fairly regular cost of up-keep has become established, the inequalities of the individual up-keep charges may merge into fairly equal charges for the up-keep of the plant as a whole. This the law of averages accomplishes to a greater or less degree. But in a small plant with few assets subject to depreciation, the equality of the whole might not result from the individual inequalities. After all, this magic rule of averages which is invoked to cover up many troublesome and embarrassing situations is obnoxious to scientific accounting; it is a makeshift which carries with it a shiftless trust in the happy outcome of things—a trust which has been so often betrayed as to carry little weight. If depreciation costs can be predetermined with a satisfactory degree of accuracy—and an estimate of them is all that can ever be made—with equal accuracy and satisfaction can up-keep costs be predetermined. The one is no more difficult than the other and equal reason exists for predetermination in both cases, viz., the securing of an equitable distribution of costs. With both estimates made at the beginning of the service life of the asset, all costs in connection with the asset can thus be prorated over the years of its service life. If, as stated above, the output is fairly regular as between periods, fair and equitable results will be obtained. If the output fluctuates violently, unsatisfactory costs and an inequitable burdening of product will be the result. The proper treatment of overtime and “beyond-capacity” work, i.e., abnormal operations, requires care. It is expected that such work will have a higher unit cost than normal output, and it is proper that a sliding scale of depreciation be applied in such a case. (b) Working Hours Method Most of the considerations taken into account for the straight line method are equally applicable to the working hours method. Here, with the service life expressed in terms of working hours instead of fiscal periods, a far step has been made towards securing an equitable distribution of depreciation costs over product. The rate per working hour can in this way be applied directly to the product. The machine-hour and sold-hour methods of costing distribute the depreciation along with all other costs on this basis of “rate per working hour.” Where a machine or other asset is limited in its use to a few operations equally wearing in their effect, this method should give satisfactory results. Where, however, one asset can be used for many different processes, involving inequalities in wear and tear, if the service rendered is the controlling factor, an inequitable distribution will result. Similarly, beyond-capacity operation, i.e., operation beyond the normal speed at which depreciation cost has been predetermined, will not be taken care of automatically by this method. Adjustment is necessary and, though arbitrarily made, must be attempted. Thus, ten articles might be turned out in one working hour, whereas an estimated output of six formed the basis for determining the rate of depreciation per working hour. As with the straight line method, so here equal care must be exercised in securing an equitable distribution of up-keep costs. (c) Composite Life Method This is not a working method for estimating individual depreciation costs, but rather a method of proof or check, which proves very valuable in some cases. The method is discussed in detail on page 197 where the uses to which it may be turned are pointed out. (d) Service Output Method The service output method bases the depreciation cost not on years of life nor on life in terms of working hours of service. Here an attempt is made to predetermine the output of the asset in terms of units of product, and so burden every unit with its fair share of depreciation. To secure full equality of charges, up-keep costs must be reckoned on the same basis, rather than on a time basis of service hours or length of life. If conditions are uniform and normal, this method, where applicable, secures perhaps the most satisfactory of all allocations of depreciation costs. To an individual machine performing several different processes the method would scarcely be applicable. To a group or battery of machines, turning out a uniform product in finished form or in the same degree of partly finished condition, the method could be well applied. The estimated total output of the group would then be taken as the basis for calculating the service output of each machine in the group. When calculating service life in whatever units, that speed of operation which secures the highest efficiency is taken as the figure of normal operation. From the foregoing it follows that the service output method of calculating the depreciation charge per unit of output is well adapted to an inherently wasting asset, such as a mine, a quarry, and timber lands, and is almost invariably applied in such cases.
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Chapters

1. Chapter 1 2. Introduction of System 3. 1. PROPORTIONAL METHODS 4. 2. VARIABLE PERCENTAGE METHODS 5. 3. COMPOUND INTEREST METHODS 6. 4. MISCELLANEOUS METHODS 7. 1. PROPORTIONAL METHODS 8. 2. VARIABLE PERCENTAGE METHODS 9. 3. COMPOUND INTEREST METHODS 10. 4. MISCELLANEOUS METHODS 11. Introduction 12. Introduction 13. CHAPTER I 14. 5. Debenture 15. CHAPTER II 16. Introduction of System 17. Chapter XXXVI, a cash discount is usually treated as a financial 18. 6. Indexing vouchers. 19. 4. It localizes responsibility by showing authority for 20. 5. It secures a receipted bill for all disbursements of cash. 21. 1. Clumsy provision for returns and allowances, partial 22. 3. The giving out of information about the business 23. CHAPTER III 24. CHAPTER IV 25. 2. Deferred Charges to | 2. Deferred Income 26. 5. Fixed Assets | 27. 4. For publication or report to regulating or 28. 6. For advertising purposes to float new issues 29. CHAPTER V 30. 12. Liquidation or forced-sale value, etc. 31. 1. For the current assets, the principle of valuation may be stated 32. 2. The principle of valuation involved in deferred charges to operation 33. 3. For the fixed assets, the principle of valuation generally 34. CHAPTER VI 35. 2. The managerial policy as to repairs, maintenance, 36. 3. The past performance and expected future performance 37. 4. All other factors locally present which may affect 38. Chapter XIII.) 39. CHAPTER VII 40. 5. Crystallization[25] 41. CHAPTER VIII 42. 2. Rates of depreciation and their relation to repairs, 43. 5. Financing depreciation and some related problems. 44. Chapter IX. 45. 4. Normal climatic conditions. 46. 5. Probable misuse and neglect brought about by the 47. 6. Probable change in ownership and consequent 48. 7. Probable change in the requirements of the market, 49. 2. Installed operating and generating machinery 50. 3. Fixed equipment including boilers and piping 51. Chapter X of the effect of the various methods used for calculating 52. CHAPTER IX 53. 4. Miscellaneous Methods 54. 4. Under some methods, an arbitrary interest rate 55. 1. PROPORTIONAL METHODS 56. 2. VARIABLE PERCENTAGE METHODS 57. 3. COMPOUND INTEREST METHODS 58. 4. MISCELLANEOUS METHODS 59. CHAPTER X 60. 2. Inadequacy, which is lack of capacity to do the 61. 3. Obsolescence, which represents the inability to 62. 1. PROPORTIONAL METHODS 63. 2. VARIABLE PERCENTAGE METHODS 64. 3. COMPOUND INTEREST METHODS 65. 4. MISCELLANEOUS METHODS 66. Chapter XI. 67. CHAPTER XI 68. 2. Estimate of life in periods, working hours, service 69. 5. Periodic appraisal value. 70. 3. Profits of the past may be reserved in the business 71. CHAPTER XII 72. Introduction 73. 4. Bank 74. 1. Cash deposited to cover breakage or damage to 75. 2. Moneys advanced to subsidiaries, salesmen, and other 76. 3. Claims against creditors for returned or damaged 77. 4. Prepayments on purchase or expense contracts, as 78. 5. Unpaid calls or instalments on stock subscription 79. 6. Claims against absconding officers for property 80. 1. In the case of a new concern where there is no past 81. 2. In the case of an outsider—a professional auditor 82. 3. Periodically, in any business, as a check on the 83. 1. The amount of outstanding trade debt at the time 84. 2. The amount of sales on credit made during the 85. 3. The total sales, both cash and credit, for the present 86. CHAPTER XIII 87. 1. Carry the market valuation, whether more or less 88. 2. In case market value is less than cost, set up a reserve 89. 3. Carry in an inner column in the body of the balance 90. Chapter XXVI of this book, where a full presentation of the case for 91. CHAPTER XIV 92. CHAPTER XV 93. 1. By practically full ownership of the subsidiary 94. 3. Through the agency of advances, particularly when, 95. CHAPTER XVI 96. Chapter IX, is the one most widely employed. It is to be preferred to 97. CHAPTER XVII 98. 1. If the building is purchased outright for cash, whatever costs 99. 2. If the building is bought by the issue of stocks or bonds, the 100. 3. When buildings are put up by the concern itself, full cost may 101. Chapter XVI, any increase or decrease in the value of the land cannot 102. CHAPTER XVIII 103. 1. _Time Lapse._ There is no such thing as wear and tear on a patent 104. 2. _Supersession._ If no other causes than time lapse were operative, 105. 3. _Obsolescence._ Akin to the element of supersession is that of 106. 1. Lump sum payments to the state or some division 107. 2. The full purchase price paid another company for 108. 3. Legal and other fees in connection with securing 109. 4. Any other legitimate expenses, such as the cost of 110. CHAPTER XIX 111. 6. Merchandise Inventory 112. Chapter XX, in the discussion of the liability, bonds. 113. CHAPTER XX 114. 1. The character of the issuing corporation under 115. 2. The security of the bonds under which come: 116. 3. The purpose of the issue, as: 117. 4. The conditions incident upon payment of principal 118. 4. A bond sold at par to be redeemed at a premium on maturity. 119. CHAPTER XXI 120. CHAPTER XXII 121. 2. Profits realized on sales of fixed assets should be first applied 122. 3. A sufficient surplus should be accumulated (in addition to the 123. CHAPTER XXIII 124. Chapter XXII, have their proper place of record direct into some margin 125. Chapter XXV on sinking funds for a full discussion of the merits and 126. 2. Reserves created to provide an additional capital 127. 3. Reserves created to provide for equalizing dividends 128. 1. Valuation Reserves 129. 5. Market Fluctuations Reserves, etc. 130. 2. Proprietorship Reserves 131. 3. Reserves for Working Capital, etc. 132. CHAPTER XXIV 133. Introduction 134. CHAPTER XXV 135. 1. The sinking fund, then, under suitable title, may appear only among 136. 2. The balance sheet may record the sinking fund status among the 137. 3. There may appear on the balance sheet as the only evidence of a 138. 4. There may be no record of the sinking fund transactions shown on 139. 1. Those dealing with the original and subsequent 140. 2. Those required to book the trustee’s periodic 141. 3. Those to show the redemption of the debt and the final 142. CHAPTER XXVI 143. 1. The difficulty of determining the rate at which 144. 2. Inasmuch as the amount of investment in current 145. 3. If interest is to be charged, how shall the offsetting 146. 4. The introduction in production costs of a more or 147. 5. As the business world is accustomed to consider 148. CHAPTER XXVII 149. Chapter XXIII on “Reserves and Surplus.” There the illegitimate use of 150. CHAPTER XXVIII 151. 1. To convey, transfer, conceal, or remove, or to permit 152. 2. To transfer while insolvent any portion of the property 153. 3. To make a general assignment for the benefit of 154. 4. For the debtor to admit in writing his inability to 155. 5. To suffer or permit, while insolvent, any creditor to 156. 1898. The courts of the Federal Government have jurisdiction in these 157. CHAPTER XXIX 158. 1. Agreement by the directors of the various companies 159. 2. Assent of the stockholders of each company to the 160. 3. Filing of certified copies of the agreement, with the 161. 4. The exchange and issuance of new stock for the 162. 1. A uniform accounting system for all the companies 163. 2. The reserves for depreciation should be based on 164. 3. Costs should be determined in the same way if the 165. 4. The apportionment of labor, factory expense, and 166. 5. Only real items of cost should be included under the 167. 6. The same methods of inventory-taking, both of 168. 7. The amount of orders on hand should be considered. 169. CHAPTER XXX 170. 2. A proper rate of turnover on the merchandise 171. 3. Economical management. 172. 3. Facilities for centralizing and comparing such

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