Depreciated cost definition
/What is Depreciated Cost?
Depreciated cost is the remaining cost of an asset after the related amount of accumulated depreciation has been deducted from it. In essence, it is the residual amount of an asset that has not yet been consumed. The concept can encompass the use of any type of depreciation, ranging from straight-line depreciation to one of the accelerated depreciation methods. Technically, the concept does not include any additional write-downs for the impairment of an asset, since the term only refers to depreciation. Nonetheless, impairment charges should also be included in the depreciated cost calculation, since these charges have in fact reduced the net book value of an asset.
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Understanding Depreciated Cost
The depreciated cost concept is not meant to equate to the market value of an asset. Depreciated cost is simply intended to gradually reduce the cost of a fixed asset over its useful life, while market value is based on the supply of and demand for a fixed asset in the marketplace. The two concepts can yield significantly different values for the same asset. Over time, depreciated cost should gradually decline, while market value can move up or down over the same period.
An analyst can review a company’s reported depreciated cost total over a number of years to see if there is an increasing or declining trend in the number; this can indicate whether management is making a sufficient investment in fixed assets over time.
Formula for Depreciated Cost
Depreciated cost is calculated as the acquisition cost of an asset, minus all accumulated depreciation to date. Acquisition costs include shipping, sales taxes, and customs fees, as well as the costs of site preparation, installation, and testing. Accumulated depreciation is the sum total of all depreciation expense charged against the asset to date. The formula for depreciated cost is as follows:
Acquisition cost - Accumulated depreciation = Depreciated cost
Examples of Depreciated Cost
Here are several examples of depreciated cost:
Depreciated asset. If a company purchased industrial equipment for $100,000 and subsequently depreciated the machine at the rate of $10,000 per year, the depreciated cost of the asset would be $30,000 at the end of seven years.
Amortized asset. If a company purchases a patent for $50,000 and subsequently amortizes the asset at the rate of $5,000 per year on a straight-line basis, then the depreciated cost (or amortized cost) of the patent would be $40,000 after two years.
Terms Similar to Depreciated Cost
Depreciated cost is also known as net book value.
FAQs
Can Depreciated Cost be Used for Selling Price Decisions?
Depreciated cost can be considered in selling price decisions, but it should not be the sole factor. It reflects the asset's book value for accounting purposes, not its current market value. To set an appropriate selling price, businesses should also evaluate fair market value, condition, and demand for the asset.