Depreciable Cost: What is & How To Calculate?

Corporate assets used to perform a wide range of business activities may decline in value due to wear and tear. Financial planners, controllers, and auditors must account for all costs and expenses, including any decrease in asset value, aka depreciation, to keep liabilities at bay and accurately forecast future costs, investments, etc.

If you are a business owner, executive manager, or entrepreneur, you must understand what the depreciable cost is to account for business expenses correctly, timely, and compliantly.

Learn how to calculate your depreciable cost, the depreciable cost formula, and how Enerpize can help you calculate your depreciable.

What is Depreciable Cost?

The depreciable cost is an asset’s depreciable cost over time. Put differently, it is an asset’s initial acquisition cost minus its estimated salvage (remaining value) at the end of its usability or lifecycle.

The value of an asset comprises its acquisition cost plus additional costs such as maintenance, repairs, duties, re-prototyping, etc.

The depreciable cost is calculated only for tangible assets (e.g., land, equipment, inventory, etc.), whereas amortization accounts for intangible assets (e.g., copyrights, patents, trademarks, etc.).

Why Calculating Depreciation Costs Is Important

Depreciation cost calculation is necessary per se. In addition to accounting for COGS, depreciation cost accounting:

• Provides accurate value estimate by accounting for initial posts plus additional refurbishment or enhancement costs.
• Allows for better asset replacement planning by timely replacing dysfunctional or aging equipment and avoiding productivity downtimes.
• Helps stabilize finances by earmarking adequate budgets for repairs or replacements and buffer against any projected or unprojected financial hiccups.
• Provides tax benefits by offering tax deductions, waivers, or rebates for depreciated assets, which could lead to unnecessary tax burdens if not accounted for correctly.

In short, depreciation cost calculation is not simply about adding another expense entry into your accounting records. Instead, depreciation cost accounting enables you, as a business owner or executive manager, to understand how your assets depreciate to control your asset expenses and, importantly, gain tax benefits.

Read More:

Depreciation Methods and Calculations: Comprehensive Guide

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How to Calculate Depreciable Cost

Two methods are used to calculate the depreciable cost:

Direct Method

This method calculates the depreciation cost by subtracting the salvage value from the initial purchase price and any additional costs. The direct method is a standard in depreciation cost accounting where depreciable costs are calculated by subtracting an asset’s salvage value from its initial acquisition cost plus additional maintenance, repairs, duties, re-prototyping, etc.

Indirect Method

This method calculates the depreciation cost without considering the salvage value. The depreciation rate is used to calculate an asset’s annual depreciation, and then all accumulated depreciation from the first year of use until the last year of usage is added.

Indirect methods used to calculate depreciation cost include:

• Straight line.
• Declining balance.
• Units of production depreciation.
• Sum-of-the-year depreciation.

Any way you choose to calculate the depreciation cost, you need to learn an essential formula to calculate your depreciables.

What is the Depreciable Cost Formula?

The formula for depreciable cost is:

Depreciable Cost = Asset Cost - Salvage Value

The Asset Cost is made up of:

Purchase Cost + Additional Refurbishment or Enhancement Costs

Depreciable Cost Calculation Example

Let’s say you purchase machinery for your business. The details are:

• Cost of Asset: $50,000
• Salvage Value: $5,000
• Useful Life: 10 years (though not directly part of the depreciable cost calculation, it will be relevant for methods like straight-line depreciation)

Using the formula:

Depreciable Cost = 50,000 − 5,000 = 45,000

The machinery's depreciable cost is $45,000. This amount will be depreciated over its useful life using an appropriate depreciation method (e.g., straight-line, declining balance, etc.).

Read Also: Cost Centers: Definition, Benefits, How it Works

How Can Enerpize Help in Depreciable Cost Calculation?

Enerpize is accounting-centric and, as such, is developed around accounting management needs. Undeniably, every business, big or small, must have an accounting system, manual or automated, to manage account needs end-to-end, expedite the reporting process, and stay compliant.

Using Enerpize's online accounting software makes depreciable cost calculation a matter of clicks by:

• Helping develop, operate, maintain, upgrade, and dispose of your assets cost-effectively to enhance your asset acquisition process.
• Calculating asset depreciation by a fixed amount to be deducted from your asset’s original value over your asset’s useful life automatically by Enerpize's online asset management software.
• Adding expenses from any device anywhere, at any time, to expedite your asset depreciation calculation process, particularly for companies with fast asset depreciation rates.
• Displaying your overall revenues, expenses, and net income in one centralized dashboard and helping you choose specific expenses to include as part of your internal or tax reports within any date range you want.
• Monitor all operation expenses, including depreciation, to maintain an iron-clad hold on your overall costs and profitability per product or department. 
• Auto-set Enerpize’s system to create a daily, weekly, or monthly recurring expense report. This will help you understand at which rate your depreciable assets are consumed and at what cost. 

Using Enerpize’s accounting software to manage your depreciation cost end-to-end keeps your depreciation costs in check and helps you grow at minimum asset loss or damage impact.

Try Enerpize for 14 days for free to properly manage your depreciation cost.

Final Thoughts

Depreciation costs refer to costs a company incurs from using an asset over a certain useful life and is calculated by subtracting initial asset cost from salvage value according to a standard formula as follows:

Depreciable Cost = Asset Cost - Salvage Value

The direct and indirect methods are used to calculate deprecation costs.

The direct method calculates depreciable costs by subtracting the salvage value from the initial purchase price and any additional costs.

The indirect method, where no salvage value is available or accounted for, calculates depreciable costs by calculating an asset’s annual depreciation, followed by calculating depreciation from an asset’s first to last year of usage. Typical indirect methods include straight line, declining method, units of production depreciation, and sum-of-the-year depreciation.

Managing depreciation costs effectively using leading accounting software is your gateway to accurate, timely, and compliant reporting, best-in-industry accounting practices, and optimum business management.