GlossaryKind of term: Cost and economicsDepreciation
What is depreciation?
Depreciation spreads the purchase cost of a machine over the years you use it; in an estimate it is one of the items in the machine hour rate.
The principle applies to any investment that lasts for years, not only to machines. With straight-line depreciation the annual charge is purchase cost less residual value, divided by the useful life in years. Purchase cost includes transport, foundation and installation, and equipment bought with the machine, such as a pallet changer or robot cell. Besides straight-line there are reducing-balance depreciation and depreciation by use, for example per spindle hour.
What does depreciation depend on?
Financial accounts and tax follow their own rules and periods. For the machine hour rate you choose a cost-accounting depreciation: over the economic life, and sometimes on replacement value rather than historical cost, so that the rate can also carry the successor. In the rate, the annual charge, together with interest on the capital employed, maintenance, floor space and energy, is divided by the productive hours.
How does depreciation work in practice?
Time-based depreciation runs on while the machine stands idle, which is why an expensive machine with few productive hours gets a high rate. Once a machine is fully written off in the books, the item disappears from the accounts, but the rate follows the cost-accounting depreciation and so does not change by itself. When the economic life has passed too, maintenance and the risk of breakdown often rise and replacement comes closer. Taking depreciation out of the rate at that point is a pricing choice, not a cost fact: the lower price eats into what should pay for the next machine.
What is depreciation often confused with?
Depreciation is not maintenance: maintenance is a recurring spend, depreciation spreads a spend already made. Nor is the cost-accounting depreciation in your rate the same as tax depreciation: period and basis can differ. And a written-off machine is not free: floor space, energy, maintenance and operation remain.
Frequently asked questions
Should a fully depreciated machine have a lower rate?
Not automatically. Your rate follows the cost-accounting depreciation, not the books. Past the economic life, maintenance often rises and replacement comes closer, and an older machine is sometimes slower or less accurate. A lower rate is then a deliberate pricing choice.
Over how many years should a CNC machine be depreciated?
For the rate, over its economic life: the years you expect it to work productively. That depends on the machine, the shifts it runs and how fast the technology dates. The tax period is agreed with your accountant and can differ.
Does depreciation belong in the machine hour rate?
As a rule, yes: depreciation belongs to the machine, divided by its productive hours. Put it in a general overhead and an old lathe and a new 5-axis machine carry the same capital cost per hour.