Sometimes some economists/accountants ask this question when developing their depreciation policy - is it even necessary to charge depreciation to include it in the cost price.
To answer this question, the main thing is to understand the following.
The money that comes in the form of proceeds from the sale of products must necessarily contain a part that is sent to compensate (refund) the funds spent in the process of its production on the purchase of raw materials, energy resources, wages, taxes and other expenses.
Simply without including in the cost of these elements, we will not be able to determine the appropriate price of products/services for the healthy functioning of our economy.
Well, for example, we did not calculate and did not include in the cost the costs of raw materials and materials that were actually used in the production of products. Accordingly, our planned price, based on the cost received, will be unreasonably underestimated in this case. I.e., when the proceeds arrive at our checking account at this price, it will not contain the part of the cache that should compensate for these costs.
The situation is similar with energy resources, labor, etc. But not with depreciation!
The fact is that such economic cost elements as raw materials, energy, labor, taxes, services included in the cost of production are short-term in nature, the need to fulfill their obligations, and depreciation is long-term, which is why it differs from other cost items.
What is meant !
For raw materials, compensation does not wait long for its time. It varies within the limits of short-term accounts receivable or accounts payable (the supplier to you or vice versa).
Today I took the raw materials - not tomorrow, so the day after tomorrow it is necessary to return money for it to the supplier. According to this principle, all these similar elements of working capital are included in the cost price.
Depreciation is an element of a long-term asset. That is, you bought the equipment today, but you need to return its value, for example, in 10 years. Usually within its standard service life. But it must be compensated in any case.
If the equipment was purchased at your own expense, then, in fact, the schedule of compensation for its cost is a contract, so to speak, between you and yourself, how you will do it.
And if the money for its purchase was taken on credit, with a certain repayment schedule and interest during these 10 years ?
Based on this approach, the depreciation policy in any organization is born.
It should answer the question of how the amount of depreciation in the price should compensate for the cost of this equipment:
- direct activation method (fast, slow, evenly)
- as received net income (without accrual)
Based on this approach, the answer to the question is whether it is necessary to charge depreciation to include it in the cost price?
If your activity is based on a market pricing mechanism, then it absolutely does not matter whether you charge it or not.
A managerial approach is important here - flexibility in the pricing system, the ability to maneuver the price without compromising its price competitiveness - so that product sales volumes do not fall due to the price factor.
It's just that the ceiling of the market price for your product will determine your ability to compensate for the cost of equipment after you pay off the received revenue for raw materials, energy, labor, etc. elements (of a short-term nature), i.e. net income.
If your activity is based on a planned pricing mechanism (which price I will count, at which I will sell), then depreciation should be calculated here and included in the cost price. Because the planning mechanism itself does not imply a management system typical of modern management that takes into account the principles of competition. There is more for the report here - I will not sell lower, I have such a cost price! And look for someone to buy at that price.
Depreciation policy - management approach: is it necessary to charge depreciation - Something like that!
