HIGHWAY COST KEEPING. 5 



progresses steadily toward the scrap pile, starting the date it is pur- 

 chased, and while its progress may be delayed it can not be prevented 

 by repairs." * It is as much an expense on a steam roller as the 

 cost of fuel burned in the fire box. In the case of fuel the expense 

 is immediate ; in the case of depreciation the expense is extended over 

 a period of time. Functional depreciation is loss due to the obsoles- 

 cence of inadequacy of equipment. 



There is no doubt in the minds of cost accountants that deprecia- 

 tion of plant and equipment should be included as a charge against 

 operation, but there is considerable difference of opinion as to how 

 depreciation should be computed. 



Three factors determine in all cases what the depreciation should be : 

 First, the original cost; second, the length of useful life; and third, 

 the scrap value of the machine when it no longer can be used for the 

 purpose for which it was purchased, or the salvage value, if it is to be 

 considered as a "second-hand" piece of equipment. Knowing these 

 factors, the problem resolves itself into how to divide the difference 

 between the original cost and the scrap or salvage value (called total 

 depreciation or wearing value) over the length of the useful life of the 

 machine. A number of formulas have been devised for computing 

 decrease in value or depreciation. Fish, in his textbook on "Engi- 

 neering Economics," explains five such formulas. Three of the more 

 commonly used are the straight line, the declining balance, and the 

 sinking fund. 



The first is recommended as the simplest and perhaps best method 

 for road work. By this method the total depreciation is divided by 

 the number of years of useful life and the quotient charged off as a 

 yearly depreciation. This is called the straight-line method, and its 

 greatest advantage is its extreme simplicity. 



The second method, a modification of the straight-line method, 

 is called the declining balance method. It is based on the theory that 

 during the earlier years of the life of any machine the repairs are 

 smallest, and therefore to arrive at a constant charge for repairs and 

 depreciation, the depreciation must be heaviest in the earlier years of 

 the life of the machine and lightest in the last. The plan, therefore, 

 is to charge off a fixed percentage annually from the net value of the 

 machine. This gives a diminishing annual charge for depreciation. In 

 the comparative table (p. 6)this annual rate is about 30 per cent. This 



is determined by the formula r = 1 — ^/- 2 in which r is the percentage 



of diminishing value, n the life of the equipment in years, v 1 the 

 original value, and v 2 the scrap value. 



1 Modem Accounting, by H. R. Hatfield. 



