Understanding
Depreciation, Fixed, and
Variable Costs
Next Generation Science / Common Core Standards Addressed!
CCSS. Math Content HSSIC.B.5 - Use data from a randomized
experiment to compare two treatments; use simulations to decide if
differences between parameters are significant.
CCSS Math Content HSSIC B.6 - Evaluate reports based on data.
Bell Work / Student Learning Objectives
Distinguish between fixed and
variable costs.
Calculate depreciation using the
straight-line method.
Calculate depreciation using the sumof-the-digits method.
Calculate depreciation using the
double-declining method.
Terms
Average fixed cost
Average total cost
Average variable cost
Break-even quantity
Depreciation
Double-declining method
Terms
Fixed costs
Marginal cost
Straight-line method
Sum-of-the-digits method
Total cost
Variable costs
Interest Approach
How do you decide if a new
enterprise for your SAE is
feasible?
Why does a new vehicle goes
down by thousands of dollars in
value as soon as it leaves the lot?
Expenditures
A business has numerous
production expenditures that are
called costs.
Fixed Costs
Fixed costs are those costs that
are constant regardless of level of
production.
Examples
Depreciation
Interest
taxes.
Fixed Costs
Fixed costs per unit of production
decreases as more product is
produced.
Variable Costs
Variable costs are those costs
that change as production levels
change.
Examples:
Fertilizer
Seed
Feed
Fuel
Hired labor
Variable Costs
Total variable costs increase as
production increases.
Total Cost
Total cost is variable costs plus
fixed costs.
Total cost increases as variable
costs increase.
Average Costs
Average variable cost
Average fixed cost
Average total cost
Average Variable Cost
Average variable cost is figured
by dividing total variable costs by
total output at any given point.
Average Fixed Costs
Average fixed cost equals total
fixed costs divided by total output
at any given point.
AFC = TFC
Average Total Cost
Average total cost equals total
cost divided by total output at any
given point.
Marginal Cost
Marginal cost equals change in the
total cost divided by the change in
output.
The cost of producing one additional
unit of product.
The level of production that
maximizes profits is where marginal
costs equal the price received for the
product.
Break-even Quantity
Break-even quantity equals the
total fixed costs divided by the
price per unit minus the direct
costs per unit.
Depreciation
Depreciation is the decline in
value of an asset due to use and
age.
Straight-line Method
The straight-line method provides
equal depreciation during each
year of the asset’s useful life.
This method is the easiest and
probably most widely used.
Straight-line Formulas
The formula for determining
straight-line depreciation is:
OC – SV divided by u
OC = original cost of the asset
SV = salvage value
U = useful life in years
Straight-Line Example
A new air seeder for a commercial
greenhouse with a cost of
$10,000 to be used for 10 years,
with a salvage value of $1,000
would depreciate $900 per year.
10,000.00 – 1,000.00 (salvage value) = 9,000.00
9000.00 / 10 yrs. = 900.00 depreciation/yr.
Sum-of-the-digits Method
The sum-of-the-digits method is a
way of calculating depreciation in
which the rate of annual
depreciation declines as an asset
becomes older.
Formula
The formula for determining
depreciation using the sum-of-the-digits
method is;
(acquisition cost – salvage value) X remaining useful life
sum of the years digits
U = useful life remaining
OC = original cost
SV = salvage value
Example
A new air seeder for a commercial
greenhouse with a cost of
$10,000 to be used for 10 years,
with a salvage value of $1,000
would depreciate $1636.36 the
first year.
This is figured as follows:
10 divided by
(10+9+8+7+6+5+4+3+2+1)
Multiply the sum by (10,000 1,000)
10 X 9,000.00 = 1,636.36
55
Double Declining Method
The double-declining method
allows for fastest depreciation
with a declining amount of
depreciation each year. Allows for
accelerated depreciation of long
lived assests.
Formula
2 divided by N multiplied by R
U = useful life
R = remaining book value at the
beginning of the year.
Salvage value is disregarded
Double Declining Method
An example: A new skid steer for
a commercial landscaper with a
cost of $30,000 will be used for
10 years, with a salvage value of
$3,000 we would depreciate
20 % the first year.
This is figured as follows
Year 1 - $ 30,000.00 – $ 3,000.00 = $ 27,000.00
$ 27,000.00 X .20 (20 %) = $ 5,400.00
$ 27,000.00 - $ 5,400.00 = $ 21,600.00
Year 2 - $ 21,600.00 X .20 (20 %) = $ 4,320.00
$ 21,600.00 – 4,320.00 = $ 17,280.00
Review/Summary
Distinguish between fixed and
variable costs.
Calculate depreciation using the
straight-line method.
Calculate depreciation using the
sum-of-the-digits method.
Calculate depreciation using the
double-declining method.
The End!