Is Depreciation Expenses A Fixed Or Variable Cost?
Depreciation is a non-cash operating activity that is used to systematically allocate an asset’s depreciable amount over its useful life.
The depreciable amount is the asset’s purchase cost minus its salvage value or other revaluation amounts. Depreciation is quantified using accounting principles and assumptions based on the enterprise’s accounting policies.
Different methods can be used to calculate depreciation, such as the straight-line method and accelerated depreciation methods.
It is important to note that depreciation is a fixed cost, as it is not dependent on the amount of production or the level of activity in the business. It is an expense that is deducted from the income statement over the life of the asset and is not affected by changes in production levels.
Fixed Cost
Investing in tangible assets leads to long-term costs that remain the same regardless of business activity. Fixed costs are one such type of cost incurred by a business, and they include items such as rent, insurance, salaries, and depreciation expenses. Fixed costs are incurred for a specific period and remain unaffected by variations in the level of business activity or sales volume.
The following is a 4 item numeric list highlighting the key characteristics of fixed costs:
- Not affected by variations in the units produced or sold
- Incurred for a specific period
- Unaffected by business activities
- Not dependent on sales volume achieved
Fixed costs are necessary for businesses to operate efficiently and are part of the cost of doing business. Businesses should account for these costs in order to ensure their long-term success. By doing so, they can make better decisions about how to allocate resources and manage their finances.
Variable Cost
Unlike fixed costs, variable costs are those that vary depending on the level of production or services provided. This means that if production or services are not provided, there will be no variable costs associated. However, if production or services are provided, variable costs will increase.
Examples of variable costs include raw materials, labour, and sales commissions. Variable costs can also include overhead costs such as rent and utilities, depending on the production or services provided.
Variable costs are typically higher in businesses that produce goods or services in large quantities. This is due to the fact that more raw materials, labour, and other resources are needed in order to meet the demands of the consumers. On the other hand, businesses that produce goods or services in small quantities may have lower variable costs due to the fact that fewer resources are needed.
The amount of variable costs associated with a business depends on the production or services provided. As such, it is important for businesses to accurately monitor their variable costs so that they can properly plan and budget for them. Additionally, it is important for businesses to be aware of the types of variable costs they incur in order to ensure that they are taking the most cost-effective approach to production and services.
Is Depreciation Expenses a Fixed or Variable Cost?
In accounting, the categorization of depreciation expenses as either a fixed or variable cost depends on the method employed to measure it.
Generally, depreciation is considered a fixed cost, as it does not vary with activity volume. However, an exception to this is the units of production method, which is considered a variable cost. This is because the method is closely tied to the number of production units and thus more consistent with variable costs.
The deciding factor as to whether depreciation is a fixed or variable cost is largely dependent on the measurement method. If the units of production method is used, depreciation can be classified as a variable cost. However, if any other method is used, such as the straight-line method, then depreciation is considered a fixed cost. It is important to note that, regardless of the cost classification, depreciation still incurs in the same amount per period throughout the asset’s useful life.
Conclusion
Depreciation is a non-cash accounting expense that accounts for the wear and tear of an asset over its useful life.
Fixed costs are those costs that do not change with an increase or decrease in production or sales volume.
Variable costs are those costs that increase or decrease with the increase or decrease in production or sales volume.
Depreciation expenses can be considered a fixed cost as it remains constant regardless of the production or sales volume.
It is important to note that depreciation is not a cash expense and does not directly affect a company’s cash flows.