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Depreciation charging difference between 2 & 3 shifts

Tharun (sd) (95 Points)

18 July 2013

Hi,

Can a Machine running two shifts be charged with depreciation 10.34%.

As per standards machine running two shifts will be charged only 7.42%.

But can a company charge 10.34% eventhough it runs only 2 shifts?

What are the effects if I charge 10.34% for a two shift running machine in terms of accounting & legal issues?

Thanks in advance.

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3 Replies

Manish Kumar Sharma (Article) (103 Points)
Replied 18 July 2013

As far as rate of companies act is concerned rate of Depreciation provided under Schedule XIV are the minimum rates, i.e. if a company thinks so it can use higher rate of Depreciation but it should be a reasonable rate and it should be justifiable ,

In your case difference in rate is not very much, and if there is justification available, that use of higher rate will show the true picture and it will depreciate the asset within the estimated useful life of the asset than use of higher rate is possible

As far as deprecation while calculating taxable income under Income tax is concerned we are to use the rates mentioned under Income Tax Rules and no other rates are allowed.

Also there was a guidance note issued by ICAI “Guidance Note on Accounting for Depreciation in Companies” you can also refer that guidance note.

Tharun (sd) (95 Points)
Replied 18 July 2013

Thanks for your reply. I'm asking this from costing point of view. Pls see the below table,

Machinery Value	10000000	10000000	10000000
Dep @ 10.34%	1034000
Dep @ 7.42%		742000
Dep @ 4.75%			475000
Machine Hrs	2496	2496	2496
Productive hrs	2246.4	2246.4	2246.4
Cost/Hr	460.29	330.31	211.45

Do u think its still fair to charge depreciation of 10.34%.

As u said the company can charge if its justifiable but I think the difference between single shift & Triple shift Cost/Hr is high.

machine hour = 8*26*12

Manish Kumar Sharma (Article) (103 Points)
Replied 18 July 2013

If you are seeing it from costing point, then you should firstly see what other Companies are doing, after that you should estimate the use full life of your machine under normal circumstances, and then calculate a rate for absorption of depreciation.

Again please note there might be a case where you, to say may estimate the use full life 3 Year (because of bad machine or 2^nd hand machine or any other abnormal reason), but normally that kind of machine can be used for 5 yrs then you should calculate absorption rate accordingly

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