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Dear John Moffat
Hope you are fine.
I have a question regarding depreciation in relevant costing. I know only future incremental CASHFLOWS are relevant, but I can NOT understand it regarding depreciation.
Suppose we buy a machine for $15.000 and we are using it in the ordinary course of business , in this case it will be depreciated 1.000 per year.
But if we detach this machine from ordinary course of business and use it for project Am then it will be depreciated 1.500 per year.
is $500 relevant in this case? if not why?? if we used the machine in the ordinary coure of business it would have 15 useful life but now that we using the machine in project A, its useful life will only be 10 years.
Thank you very much
The depreciation is not relevant because it is not a cash flow – it is simply a way of spreading the initial cost over the estimated life of the machine for accounting purposes. Whichever method we use to depreciate it does not change the fact that the cost remains at $15,000.
If it were the case that the useful life of the machine were to change, then this could have a relevant, but not because of depreciation. It would mean that using it on project A would generate income for a total of 10 years but would lose whatever income it was currently generating for a total of 15 years.