March 1. 1920.] 



THE INDIA RUBBER WORLD 



343 



accountant with the pleasant feeling that he really strengthens 

 the financial position of his firm. Having followed a safe course 

 fur so many years, there is little reason to suspect its unsound- 

 ness until actual disaster overcomes the enterprise. The process 

 of attrition proceeds slowly; the danger as a rule is not noticed 



until 



goes 



o late to make amends, and the firm simply 

 lo sleep as so many others do, after having run through an 

 apparently prosperous existence of IS to 18 years, the time 

 that is re(|uired to make the equipment industrially incom- 

 |)etitive. 



Sulistitute fur the word depreciation the word replacement, 

 and an entirely new atmosphere is created. The words replace- 

 ment fund do not only suggest the recording of the progress 

 of loss of effectiveness in machine depreciation as a matter 

 of routine, but replaces it by an actual payment from the profits 

 of the enterprise as an offset against this loss. A purely theo- 

 retical problem becomes suddenly very much alive. Deprecia- 

 lion and loss of effectiveness become tangible meanings, and 

 while opinions may differ about the amount that will have to 

 l>e written off, it will give the factory its full safety for con- 

 tinued prosperity. Further, if the money is taken actually from 

 'he profits there is /^rima t'tidr evidence of the annual cost of 

 depreciation to the fac- 

 tory, and the influence of 

 the depreciation charge 

 upon manufacturing cost 

 is not so easily over- 

 looked. The equipment 

 replacement fund be- 

 comes a very effective 

 safety valve, protecting 

 the factory not only 

 against slow deprecia- 

 tion, but giving it the 

 means for making occa- 

 sional equipment im- 

 provements. 



.\ number of systems 

 have been proposed tn 

 make the depreciation 

 charge mure fitting to 

 actual conditions and to 

 bring the depreciation 

 factor into more imme- 

 diate bearing upon the 



cost estimating policy of the firm. The following system 

 may appeal to most rubber manufacturers because it can 

 be easily employed over a great variety of equipment, and 

 because it can easily be used for the purpose of checking 

 depreciation cost in the different subdivisions of a large manu- 

 facturing c( ncern. The system is based upon the principle 

 of making the depreciation charge upon the rate of actual eni- 

 ploymcni. and to charge upon the real replacement value of 

 tile eciuipment. 



HOW THE METHOD SHOULD BE EMPLOYED. 



Tu explain the system it may be best to return again to the 

 original example of a rubber factory with a machinery equip- 

 ment costing $200,000 during the year 1914. The year 1917 may 

 be used for the purposes of demonstrating the method. This 

 year belonged to the most strenuous years in the war history 

 of the rubber industry. It required an enormous expansion of 

 all production in support of the army equipment industries, and 

 most factories worked overtime all through the year. It does 

 not matter here what the actual rate of employment of our 

 factories was. We may assume, however, that the factory 

 under consideration has worked with three shifts during the 

 second six months of the year, having viforked upon a normal 

 production of eight hours during the first half only. Assuming 

 that experience has shown the rate of 8 per cent as approxi- 

 mately correct for the purpose of making a depreciation charge 



under normal occupation of the equipment, it must be taken 

 lor granted that for the first half-year depreciation has nor- 

 mally developed upon the indicated level. From the beginning 

 of July, however, the factory has changed its working policy. 

 It has worked 24 hours a day and equipment has been in use, 

 not the customary eight hours, but three times that period. 

 Depreciation, therefore, has proceeded not at the rate of 8 

 per cent per day, but at 24 per cent. Loss of industrial ef- 

 fectiveness of the equipment under such conditions would not 

 liave been reached after ten years, approximately, but at a time 

 slightly over three years and four months. In fact the equip- 

 ment would have required renewal during the present year, 

 allowing for a normal depreciation during the years 1914 to 

 1917. The depreciation of the equipment in this factory, there- 

 fore, proceeded at an average of 16 per cent for the whole year, 

 and was less effective industrially than the preceding year 

 when the time came for drawing the annual balance. 



Having established in this way the factor of depreciation, 

 it is neccessary to inquire into the value of the equipment to 

 the factory. If the works had burned down suddenly or other- 

 wise been destroyed, by the end of 1917 the equipment could 

 not ha\e been replaced for the $200,000 at which it stood on 

 the books: $300,000 at 

 least would have been 

 needed for that purpose. 

 This also would have 

 been the amount ob- 

 tained by making a 

 complete valuation of 

 all the equipment of the 

 factory at the existing 

 replacement value. The 

 cost of depreciation of 

 equipment in that fac- 

 tory, therefore, was dur- 

 ing the year 1917 as 

 follows: 

 Six months employ- 

 ment of equipment at 

 8 hours a day. 

 Kate of depreciation, 8 



per cent. 

 Six months employ- 

 ment of equipment at 

 24 hours a day. 

 Kate of depreciation, 24 

 per cent. 

 .\verage annual depreciation of equipment, 16 per cent. 

 Replacement cost of equipment to date, $300,000. 

 Total charge to depreciation cost, $48,000. 



The annual charge under the old method would have been 

 $16,000, a loss to the factory of $32,000 in operation cost, if 

 not, taken care of in the charge to manufacturing cost. 

 SHOWING ADVANTAGE OF NEW METHOD. 

 But the proof of the pudding is in tlie eating. Does this 

 system really guard a factory against both the increasing speed 

 of depreciation incurred by increased production and also against 

 the increasing price of the equipment? Let us suppose that 

 equipment prices would have remained approximately the same 

 at the end of 1918 and that this factory also has continued 

 to work at the rate of 24 hours during 1918, with the certainty 

 of having to replace its total equipment somewhere near the 

 end of 1920. We would then have the years 1914, 1915 and 

 1916 as normal years, with equipment prices remaining ap- 

 proximately at the level of 1914 and employment at 8 hours 

 per day. During three years the factory would then have 

 charged a level 8 per cent of depreciation, and it would have 

 had in hand a repurchase fund of $48,000 plus interest and 

 :in equipment still worth approximately seven years' effective 

 employment. The next year 1917 would have added $48,000 

 to the fund, while 1918 would provide $72,000. By the end 

 of 1918 two years of effectiveness might still be left, and dur- 



Equipment Repurchase Fund Sufficient to Protect You 

 \G.\i.\ST the Rise in Cost of Rubber M-\chinerv? 



