Cost Is Fixed Cost or Variable Cost in Nature?
Q: Is depreciation expense or depreciation cost is fixed cost or variable cost in nature?
Fixed costs:
Fixed costs are such costs that do not change with the change in activity level within the relevant range. Where relevant range can be defined in terms of time or activity level.
Variable costs:
Variable costs are such costs that change with the change in activity level .
Coming to the question, depreciation expense or depreciation cost can either be fixed or variable and this depends on the method adopted to measure depreciation.
There are number of methods to calculate depreciation but to simplify things we are stick to the methods mentioned under International Accounting Standard (IAS) 16: Property, Plant and Equipment. According to IAS 16 para 62 methods include: * Straight-line method * Diminishing balance method (also known as reducing balance method) * Units of production method
Straight line method
Under straight line method, keeping other things constant, results in a constant charge over a useful life of the asset i.e. a fixed amount out of carrying amount of asset will be charged as an expense every year. Therefore, depreciation cost/expense calculated under straight-line method will be of the nature of fixed cost.
Units of production method:
Under units of production method we connect the depreciation with the number of units produced or simply activity level. Simply saying, more the units produced, more the depreciation charge will be and if number of units produce decreases then depreciation will decrease as well. As this change in depreciation is due the change in activity level we can safely say that depreciation calculated under units of production method is of the nature of variable cost.
Diminishing balance method:
The most controversial method, for this question in specific, is diminishing balance method or reducing balance method.
According to some the depreciation calculated under diminishing balance method is of
Fixed costs:
Fixed costs are such costs that do not change with the change in activity level within the relevant range. Where relevant range can be defined in terms of time or activity level.
Variable costs:
Variable costs are such costs that change with the change in activity level .
Coming to the question, depreciation expense or depreciation cost can either be fixed or variable and this depends on the method adopted to measure depreciation.
There are number of methods to calculate depreciation but to simplify things we are stick to the methods mentioned under International Accounting Standard (IAS) 16: Property, Plant and Equipment. According to IAS 16 para 62 methods include: * Straight-line method * Diminishing balance method (also known as reducing balance method) * Units of production method
Straight line method
Under straight line method, keeping other things constant, results in a constant charge over a useful life of the asset i.e. a fixed amount out of carrying amount of asset will be charged as an expense every year. Therefore, depreciation cost/expense calculated under straight-line method will be of the nature of fixed cost.
Units of production method:
Under units of production method we connect the depreciation with the number of units produced or simply activity level. Simply saying, more the units produced, more the depreciation charge will be and if number of units produce decreases then depreciation will decrease as well. As this change in depreciation is due the change in activity level we can safely say that depreciation calculated under units of production method is of the nature of variable cost.
Diminishing balance method:
The most controversial method, for this question in specific, is diminishing balance method or reducing balance method.
According to some the depreciation calculated under diminishing balance method is of