In connection with the machinery record, a complete map showing location and number of every machine is especially desirable. In case of fire it makes identification easy.
Methods of Application of Depreciation
In the application of depreciation, three methods are used more generally than any others. The straight line method, as discussed in [Chapter IX], is the one most widely employed. It is to be preferred to all others, giving satisfactory results and being easy of application. The fixed rate of diminishing value method also has many adherents, and depreciation based on the number of units of product turned out is a third method often used where applicable—though applicable in a very limited degree.
Under the straight line method, it may be ventured as an opinion that 10% is a fair average minimum rate and 15% to 20% an average maximum. The knowledge as to what constitutes an average rate serves little useful purpose, however, although it does give a rough estimate when spread over a large variety of machines. It has been said that from a mechanical point of view no machine can depreciate actually more than 30% and be operated efficiently. This does not, of course, mean that the depreciation reserve should never show more than a 30% offset to the value of the machine, as this would indicate too high a rate were the machine still in operation. It does mean that, according to a theoretical standard of operating efficiency, any machine which cannot fulfill at least a 70% efficiency test should no longer be used. It should be remembered that the depreciation reserve is a device for financing depreciation and nothing else.
Basis of Valuation
The basis, therefore, for the valuation of machinery is its full cost less estimated depreciation. Such an appraisal is subject to periodic revision by comparing the estimated with actual depreciation as more of the facts brought out by the period of life already expired become available. Perhaps the method of inventory, as will be explained in connection with hand tools, is best applicable to machine tools and even to certain small bench machines on the boundary line between tools and machines. However, special tools made for a particular purpose and perhaps not adapted to any other use should be charged against the job and not carried as an asset.
Scrap Material
A financial consideration in connection with machinery is the disposal of scrap material. This should be disposed of as advantageously as possible. It should be held until the market for old metals is high, if at the time of its discard prices are abnormally low.
Accounting for Tools
With regard to the method of accounting for hand and shop tools and the basis for valuing them, the additional factor of possibility of loss claims consideration. Unlike machines, which are for the most part securely attached to the premises, tools are loose, they may be carried off or lost, and so not only loss in value due to depreciation but loss from theft or carelessness must be taken account of. Unless an adequate control is established over the physical handling of loose tools, a very considerable leak may result at this point.