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 or 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 — -*/-? 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 Modern Accounting, by H. R. Hatfield. 
