Depreciation and corn

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Depreciation and corn

Share Depreciation This chapter offers a distinction between depreciation for income tax purposes and depreciation for managerial purposes, and encourages business managers to focus more on depreciation for managerial purposes. Depreciation is a cost, but what is depreciation? Depreciation is the allocation of cost of an asset among the time periods when the asset is used.

For example, the cost of a machine that is used to produce products during several production periods should be distributed among those production periods. Depreciation is the concept for allocating that cost. Do not allow "managing depreciation for income tax purposes" to interfere with understanding depreciation for management purposes.

These are distinct topics and should be addressed as distinct topics. In understanding depreciation for management purposes, the manager will strive to develop and follow a depreciation method that results in an accurate statement of costs and net income, without income tax considerations.

Depreciation for purposes of management can be described as a procedure to allocate or assign a portion of the cost of an asset to each production period during which the asset is used.

Deducting a depreciation allowance from the cost of an item does NOT reveal value of the item. However, the value of an item provides insight into depreciation. Market value reveals some insight into depreciation but a depreciation allowance has little or no relationship to the items market value.

An example of calculating depreciation based on a question from a farm manager who also is a former student. Depreciation Depreciation is a procedure to allocate or assign a portion of the cost of an asset to each production period during which the asset is used.

Profit is defined as "the difference between the revenue generated during a period to time and the costs incurred to generate that revenue during Depreciation and corn period of time. Accordingly, a procedure is necessary to allocate an appropriate portion of the cost of the input among the several time periods during which it will be used in the production process.

This procedure of allocating cost is generally referred to as calculating depreciation; that is, assigning a portion of the cost of an asset to each production period during which the asset is used.

Rising Corn Prices Hurt Ethanol Profits

To simplify the procedure, the calculations are often based on time; for example, some methods of depreciation allocate a portion of the cost of the machine to each production period during which the machine will be used.

An alternative to allocating cost on the basis of time is to allocate the cost on the basis of use; thus, if the machine is used more heavily during one production period than during another, more of the cost of the machine will be assigned to the period of heavy use than to the period of light use.

This alternative should provide the business manager with better information, that is, a more accurate measure of the cost to operate the business, and thus the profit generated by the business during each production period.

Land is not considered a depreciable asset; presumably, land will not wear out or become obsolete. However, improvements to land are considered depreciable assets; for example, a well, dam, building, fence, irrigation system, or drainage system will wear out.

A depreciable asset is an item that is used in more than one production period but will not last forever. Depreciation is a procedure for allocating the cost of a depreciable asset among the production periods and enterprises? Depreciation for income tax purposes Perhaps the most frequent application of depreciation is in calculating the business net income profit?

However, the depreciation allowance for income tax purposes is not likely to reflect the actual use of the machine. Accordingly, it is a common recommendation that businesses maintain two depreciation schedules -- one that complies with income tax law and one that more accurately allocates the cost of the machine over its useful life.

This page focuses on the second objective. Depreciation for management purposes Perhaps the simplest procedure for calculating depreciation is a straight line method; that is, assign an equal portion of the cost of the machine to each production period during which it will be used.

This simple approach, however, may not provide the best information for the manager. For example, a new machine may be used more intensely immediately after it is acquired than it may be used in later years.

Another justification for this practice is that the market value drops most significantly during the early years even if the machine is not being heavily used.

Depreciation Based on Use Instead this page suggests another way to consider depreciation for management purposes as opposed to depreciation for income tax purposes.

For example, a tractor may have a projected useful life of 15, hours even if the original buyer does not intend to own it that long; presumably someone else will purchase the used tractor and continue to operate it until it is "fully consumed" at 15, hours.

Using an hourly rate to calculate depreciate now allows the manager to assign an appropriate portion of the cost of the tractor to each activity. Using an hourly rate for depreciation also simplifies the question of allocating cost among enterprise.

This method assumes a form of straight line depreciation, but it allows the manager to more accurately assign the cost of the tractor to its actual use.

Depreciation and corn

This depreciation cost per acre can then be used to allocate cost of the machine among enterprises and production periods. Depreciation and Relationship to Cash Flow The concept of depreciation has some unique characteristics relative to other operating cost.

The primary difference is that when the cost of depreciation will be accounted for by the business in computing its profit will not align with when the business has to pay for the machine.

Thus the cash outflow to purchase the tractor does not align with when the depreciation will be recognized and subtracted as a cost. It is critical that managers understand the distinction between cost as reported on an income statement and cash outflow as reported on a cash flow statement.

The two concepts are not the same.For corn production, the largest input cost shares were fixed capital and 8 fertilizers, with and percent shares respectively; other direct services were only percent. Few equipment purchases devliver the ROI of a Drago corn head.

See for yourself. WHEN YOU PLAN TO BUY EQUIPMENT, MAKE SURE IT PAYS YOU BACK Few equipment purchases deliver the ROI of a Drago corn head. See for yourself. THE SERIES II. MEET THE CORN . Depreciation Accounting - Fall in the Value of a Tangible Asset i.e.

Depreciation has been discussed. The reasons of such fall, Objectives of recording depreciation in Accounting have been explained. We have also considered the different methods of charging depreciation. Ethanol plant investment using net present value and real options analyses. A real options analysis of entry–exit decisions for dry-grind corn ethanol plants is conducted to incorporate the impact of rising volatility in market prices.

for capital and depreciation . • Corn — $ bushels per acre or $ per acre. You can substitute the term debt payments that will be covered from the crop for machinery and building depreciation and term interest payments.

It is simply a swap of economic cost for a cash cost. Projected Margins and Breakeven Prices for Corn. By: Both budgets incorporate cash costs and depreciation as well as opportunity costs.

Depreciation and corn

Table 1 presents enterprise budgets for rotation corn on average productivity soil in Indiana for

Tax Topics: Depreciation