Graphic Chart—Working Hours Method
(c) Composite Life Method
Another proportional method, which in its operation is similar to the straight line method, is known as the “Composite Life” method. Its feature is the calculation of depreciation on the plant as a whole, rather than on each individual asset. Under it what is known as the mean life of the plant is calculated. Depreciation may then be estimated, on the straight line or other basis, for the entire plant. To determine mean life it is necessary to “weight” the life of each individual asset with its value and so get a common basis, the dollar-year, for all assets. The process of calculating mean life will be explained in [Chapter XI] where also its use and adaptability are discussed. Aside from the determination of mean life, the method does not differ from others which have been or will be discussed.
(d) Service Output Method
A fourth type of proportional method is known as the “Service Output” method. Under it, the life of the asset is reckoned in terms of quantity of output. This is very similar to the working hours method but differs in the unit of measurement for service life. The life of the asset is measured by its product. Thus, the life of a water filter may be given in terms of gallons or cubic feet of water run through it; that of a rock crusher in terms of the cubic feet of rock handled; that of a freight car or engine in terms of car miles; and so on. If, therefore, record is kept of the performance of such an asset for the fiscal period, the amount of depreciation to be charged off is readily calculated, being such a portion of the total depreciation as the units of output for the current period bear to the total units of life output. It is thus a straight proportional method. Its appraisal schedule and graphical representation are exactly similar to those of the working hours method. It should be said, however, that sometimes the service output method is operated on a sinking fund basis instead of on a total depreciation basis. When the sinking fund basis is used, the total payments into the fund, excluding all interest accretions, constitute the total amount of depreciation to be distributed over the service output.
2. Variable Percentage Methods
The second main classification of methods, called for want of a better title, “Variable Percentage” methods, differs from the proportional methods in that either the base or the percentage rate varies for each estimate of depreciation. The various proportional methods can all be expressed as percentages but their base remains fixed and is always the total amount of depreciation to be charged off. Under the variable percentage methods, if the percentage is fixed, the base varies; and if the base is fixed, the percentage varies. The subclasses here are:
(a) Fixed Percentage of Diminishing Value Method
(b) “Changing Percentage of Cost Less Scrap” Method (sometimes known as the “Sum of Expected Life-Periods” Method)
(c) Arbitrary with Increasing Amounts