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Depreciation cost to be included in cost of a product?

Raj Prakash (Accounts) (144 Points)

25 April 2016

Dear Expert,

Whether depreciation is to be added to cost of a product, please explain me along with justification.

Thanks in Advance

Raj

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2 Replies

Kaushik Joshi (Practising Chartered Accountant) (1527 Points)
Replied 25 April 2016

Dear Raj,
I assume you are asking in context to valuation of a product cost. In order to know the cost incurred by us for the product, we need to consider both direct and indirect costs. Direct costs are those which are directly attributable to the manufacturing of the product. But while preparing the product, we have also incurred other costs without which the product cannot be produced. eg. Factory if running in a rented place, then without the payment of rent, you won't be able to produce the product. Similarly, without using the machines, you cannot produce the product. These machines undergo wear and tear while being used. Hence in order to calculate the correct value of the product, the wear and tear cost incurred by the machine for the manufacturing of the product is to be considered I.E. Deprecation.