Depreciation

1
Depreciation

• Two calculation methods
• Prime Cost straight line D (Cost -
  Salvage)/Nlife iC
• Diminishing Value exponential D ipresent
  (depreciated) value
• allowed rates by ATO have diminishing value rate
  25 higher then prime cost rate

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
2
Depreciation

• Taxpayers are able to self assess their own
  effective life for assets but many choose to use
  the 'safe harbour' rates published by the Tax
  Office - ATO 17th May 2000
• typical values (prime cost) were motor vehicles
  22.5, plant 7.5, office equipment 15,
  electronic equipment 33, buildings 4
• regularly updated by ATO

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
3
Depreciation

• Remember depreciation money is still in the
  company and unless spent, increases the cash
  available for company purposes.
• For uniform trading conditions, the real cash
  gain for a firm is the profit plus depreciation
  less dividend or net repayments of capital made
  from the profit and loss appropriation or capital
  accounts during the period.

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
4
Budgeting

• Necessary (financial) planning
• For public service and for sections within a
  company, it can simply involve the division of an
  allocation of funds
• For charities and other not-for-profit
  organisations, it can mean estimating the
  (annual) expected income then determining the
  annual expenditure

5
Budgeting

• For commercial enterprises, there is also the
  need to be concerned with cash flow
• it is not sufficient to ensure a profit is made
  at the end of the year
• need to be able to pay all bills as they fall
  due, esp. wages and utilities
• A budget allows estimates to be made of any loans
  that may be necessary IN ADVANCE

6
Budgeting

• A budget is a PLAN and as such may change during
  the year
• this should not be an excuse for not taking the
  budgeting process seriously
• this should not be an excuse for ignoring the
  budget

7
Profit Loss Budget
Business Plan
Advertising Budget
Sales Plan
Distribution Budget
Revenue Budget
Prodn Admin Plan
Labour Plan
Equipment Plan
Capital Budget
8

• In practice companies will have a number of
  budgets informed by various plans
• Business plan informs the sales plan
• Sales plan informs the operations plan and the
  advertising and distribution budgets
• Operations plan informs the labour plan and
  equipment plan
• Revenue budget is based on the advertising
  distribution budgets and labour plan
• Capital budget depends on the distribution
  budget and equipment plan

9
Budgetary Control

• A system of managing a business by making
  forecasts of the different activities and
  applying a financial value to each
  forecast. Actual performance is subsequently
  compared with the estimates.

10
Budgeting

• Because a number of costs (and revenue) are
  dependent on sales, it can be more useful to use
  a flex budget
• Variable costs are expressed as percentages of
  the budget case for 100 sales
• e.g. if sales are above budget by 10 then it is
  reasonable to expect raw materials to also be
  above budget by about 10