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- Title
DEPRECIATION THEORY AND THE COST OF FUNDS.
- Authors
Wright, F. Kenneth
- Abstract
The shape of the ideal depreciation curve for an asset depends partly on the shape of the net receipts curve and partly on the criteria which the depreciation curve is required to meet. In the present article, the focus is on the simplest net receipts curve constant net receipts- and investigate the effect of different criteria on the shape of the depreciation curve. Two main criteria will be considered: The depreciation of the facility for each period should be proportional to its net contribution to period earnings and secondly, the net period returns from the facility should be proportional to the net investment in the facility. A choice has to be made between the two main criteria, since it is impossible to satisfy both except in the special case of the marginal investment, the earnings of which are just sufficient to cover the cost of funds. Different criteria may be appropriate for different purposes. For instance the rate-of-return criterion may have advantages where income is used as an index of managerial performance.
- Subjects
DEPRECIATION; CORPORATION reserves; COST accounting; ACCOUNTING; STRANDED investment; COST allocation; TAX deductions; CAPITAL losses
- Publication
Accounting Review, 1963, Vol 38, Issue 1, p87
- ISSN
0001-4826
- Publication type
Article