WHAT IS MACHINE HOUR RATE OF DEPRECIATION
Under machine hour rate of depreciation, the depreciation is usually directly proportional to the number of machine hours. Depreciation is calculated on the basis of the usage of the machinery. The machine hours are calculated for the estimated useful life of the asset, assuming that the machinery works for certain hours a day on an average. This method is also not generally used by companies as it is difficult to say exactly the number of hours a machinery would work per day. It is widely used for assets like plant and machinery, vehicles etc.
ADVANTAGES OF MACHINE HOUR RATE METHOD OF DEPRECIATION
The advantages of machine hour rate of depreciation is that the depreciation is not calculated on adhoc basis or based on assumptions. It is exactly calculated on the basis of machine hours clocked by the asset/machinery.
DISADVANTAGES OF MACHINE HOUR RATE METHOD OF DEPRECIATION
The disadvantage of machine hour rate of depreciation is that the depreciation can be calculated only if the company is able to determine the number of hours, the said machinery will clock during its life time. If the machinery works for more than the estimated or less than the estimated number of hours, then this method of charging depreciation fails.
In short, it becomes all the more difficult to assess the machine hour rate, if the machinery works for more than one shift in a day.
USEFUL LIFE OF THE ASSET
The useful life of any asset purchased can be determined from Schedule II to the Companies Act, 2013.
MACHINE HOUR RATE OF DEPRECIATION FORMULA
Rate of Depreciation = Original Cost of the Asset - Scrap Value
No.of years of Useful Life (in Machine Hours)
Depreciation = Actual Number of Hours * Rate of Depreciation
MACHINE HOUR RATE METHOD OF DEPRECIATION - EXAMPLE
A Machinery was purchased for Rs.50,00,000 with an estimated working hours or machine hours of about 25000 hours. The expected scrap value is Rs.2,00,000 and the estimated machine hours for 10 years is as follows. You are required to calculate the depreciation under the machine hours method.
Year Machine Hours
1-3 3000 Hours
4-6 2600 Hours
7-10 800 Hours
DETERMINATION OF ANNUAL DEPRECIATION UNDER MACHINE HOUR RATE METHOD
Year Annual Depreciation
1-3 3000/25000 * ( Rs.50,00,000 - Rs.2,00,000) = Rs.5,76,000
4-6 2600/25000 * (Rs.50,00,000 - Rs.2,00,000) = Rs.4,99,200
7-10 800/25000 * (Rs.50,00,000 - Rs.2,00,000) = Rs.1,53,600
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