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Depreciation and Costings

Depreciation and Costings


I have a particular question about cost accounting and depreciation . This is also tied up with pricing.

The basic question is if, in a job costing system, I should or shouldn't include a depreciation value into the overhead calculation which will then feed into an overhead cost per direct labour hour for a service, not a product company. 

The background is this:

I have recently calculated an overhead charge per direct labour hour. This was based on an analysis I made on the previous 12 months figures.

From this overhead charge per direct labour hour, I can calculate how much a job has cost to perform. I use the job's time card plus the cost of the direct materials to determine this. 

The price we charge to the customer per job, is on average, the cost price plus 20%. 

Recently, we bought a new piece of equipment and this has reduced the time spent on each job in terms of direct labour hours. 

This has in turn made the process more efficient and reduced our cost price.

This, based on our sales price formula of cost price plus 20% could, theoretically, reduce the price we charge to our customers.

(This may be good for competition on price, but it doesn't feed the cost of the investment so far as I can see)

My thoughts are that an annual charge for depreciation should be included into an overhead calculation for costing purposes since if this isn't there, the cost of new investment isn't a component of the price charged out. 

Any help welcomed :-)



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By neileg
10th May 2012 11:21

Two ways

The text book approach is to include depreciation in the overhead. An alternative is calculate an hourly rate for the machine and charge this to the job on a timesheet basis just like labour.

Thanks (1)
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