Answer to Question #307437 in Accounting for Joel

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

I think, it would be better for Liam to think of the time rather than the usage of the machine.He expects sales to increase over the next five years, I can see that he is going to use the equipment heavily as time progresses. He is even going to buy a second machine later, which means the products will be in high-demanded. The units-of-production depreciation method bases depreciation on the actual usage of the asset, which is more appropriate when an asset’s life is a function of usage instead of time. All equipment and machines have a limited life-span and production capacity, so, they can produce only a limited number of products.The depreciation method will begin when the machine starts producing and will end when the cost of this equipment is fully recovered (this equipment will produce all products within its production capacity).As Liam's business is silk-screening, it is impossible to operate without special equipment, I think that this depreciation method is logical and practical. As time progresses, the depreciation expense will be higher, and the production rate will be lower and vice versa.The units-of-production depreciation method is more accurate in matching cost and revenue, andmore closely reflects actual asset depreciation with different levels of activity