Basis of Use System of Depreciation of Depreciation

12/08/2008 23:27

 

Basis of Use System of Depreciation of Depreciation:

Learning Objectives:

  1. Define and explain the basis of use system of depreciation.

One of the chief factors causing depreciation is use. For example in the case of plant and machinery, it is the total number of hours for which the machines work is the main factor and not their life. Therefore, depreciation should be charged on the basis of use. In order to calculate, the total number of hours for which the machine is estimated to work is ascertained. The net cost of the asset is divided by the number of hours estimated and the result would give the amount of depreciation per hour. Each year depreciation would be written off at this rate on the number of hours worked during the year.

Example:

A machine is bought for $40,000 and its life is estimated at 20,000 hours. The hourly rate of depreciation will be $2. If in a year machine is used for 1,000 hours, depreciation will be $2,000 (1,000 × 2).