Evaluation of Depreciation Methods: Recommendation for Burley Designs

This memo analyzes three depreciation methods—straight-line, double declining balance, and units of production—for a machine purchased by Burley Designs. The straight-line method, though simple, distributes depreciation evenly over the asset's life, potentially misrepresenting the true cost of asset use. The double declining balance method offers a more technically sound approach, reflecting the asset's declining value over time. The units of production method links depreciation to actual asset usage. The analysis includes detailed depreciation schedules, advantages, and disadvantages for each method. The memo concludes that the double declining balance method is the most suitable option for Burley Designs as it provides a more accurate representation of the asset's cost of use and can be applied to all assets. This analysis is presented to provide insights into financial accounting and depreciation methods.

Memo
To: Burley Designs
From: BA211 Student
Date: 15 August 2017
Re: Recommendation regarding depreciation method to Burley Designs
The purpose of this memo is to make an analysis for depreciation under various methods on a
machine purchased by Burley Designs and to recommend the best method.
Straight line depreciation method
Straight line method of depreciation is the easiest method to apply depreciation on any asset.
Depreciation schedule under this method is,
Calculation of yearly depreciation
Cost of machine $ 18,250.00
(-) Salvage value $ 2,000.00
Depreciable amount $ 16,250.00
(÷) life of the asset 7 years
Per year depreciation $ 2,321.43
Depreciation schedule
Yea
r Depreciable amount
Current year
depreciation
Cumulative
depreciation Net book value
0 $ 16,250.00 $18,250.00
1 $ 16,250.00 $ 2,321.43 2,321.43 $ 15,928.57
2 $ 13,928.57 $ 2,321.43 $ 4,642.86 $ 13,607.14
3 $ 11,607.14 $ 2,321.43 $6,964.29 $11,285.71
4 $ 9,285.71 $ 2,321.43 $ 9,285.71 $8,964.29
5 $ 6,964.29 $ 2,321.43 $ 11,607.14 $ 6,642.86
6 $4,642.86 $ 2,321.43 $13,928.57 $ 4,321.43
7 $ 2,321.43 $ 2,321.43 $16,250.00 $2,000.00
Advantages and disadvantages of straight line method

Advantages:
 This is easy to understand method; even a non-professional can also use this method
easily.
 This method can be used by small firms easily.
 This method provides total depreciable amount over the useful life of the asset.
Disadvantage:
 Under this method in the ending years of useful life, the cost of using asset will increase
due to an equal amount of depreciation and higher cost of repairing.
 This method is illogical because in initial years amount of depreciation must be higher
and in ending year it must be lower.1
Double declining balance method of depreciation
Double declining balance method of depreciation is a technical method to apply depreciation on
any asset. Depreciation schedule under this method is,
Calculation of yearly depreciation rate on depreciable amount
Cost of machine $18,250.00
(-) Salvage value $2,000.00
Depreciable amount $16,250.00
life of the asset 7 years
Depreciation rate Under double declining method 2/7 = 28.57%
Depreciation schedule
Year Rate of depreciation
current year
depreciation
Cumulative
depreciation Net book value
0 $18,250.00
1 28.57% $5,214.29 5,214.29 $13,035.71
2 28.57% $3,724.49 $8,938.78 $9,311.22
3 28.57% $2,660.35 $11,599.13 $6,650.87
4 28.57% $1,900.25 $13,499.38 $4,750.62
5 28.57% $1,357.32 $14,856.70 $3,393.30
6 28.57% $969.52 $15,826.21 $2,423.79
7 28.57% $423.79 $16,250.00 $2,000.00
1 Archibald, T. R. (1967). The return to straight-line depreciation: An analysis of a change in
accounting method. Journal of accounting Research, 164-180.

Advantages and disadvantages of under double declining method
Advantages:
 Under this method in the ending years of useful life, the cost of using asset will remain
same due to declining amount of depreciation and higher cost of repairing.2
 This method presents a good way to show the use of asset under different years of useful
life of the asset.
Disadvantage:
 It is difficult to use for a non accounting professional.
Units of production depreciation method
Units of production depreciation method is required calculation of depreciation as per the
number of units produced by asset in the year. Depreciation schedule under this method is,
Calculation of yearly depreciation
Cost of machine $18,250.00
(-) Salvage value $2,000.00
Depreciable amount $16,250.00
(÷) total number of units produced 113050
Depreciation per unit produced $0.14
Depreciation schedule
Year
Depreciation per
unit produced
Number of units
produced
Current year
depreciation
Cumulative
depreciation
Net book
value
0 $18,250.00
1 $0.14 13,500 $1,940.51 $1,940.51 $16,309.49
2 $0.14 14,250 $2,048.32 $3,988.83 $14,261.17
3 $0.14 15,000 $2,156.13 $6,144.96 $12,105.04
4 $0.14 16,200 $2,328.62 $8,473.57 $9,776.43
5 $0.14 17,000 $2,443.61 $10,917.18 $7,332.82
6 $0.14 18,000 $2,587.35 $13,504.53 $4,745.47
7 $0.14 19,100 $2,745.47 $16,250.00 $2,000.00
Advantages and disadvantages of units of production method
2 Declining balance depreciation methods | interunet. (2017). Interunet.com. Retrieved 15 August
2017, from http://interunet.com/declining-balance-depreciation-methods

Advantages:
 This method is the best way to represent the cost of use of the asset in the various years
through the units produced during various years of useful life of the asset.3
 This method of depreciation clearly represents the relationship between units produced
by asset during the year and cost of depreciation during the year.
Disadvantage:
 This method is illogical because under this method if the asset will not produce any unit
during the year then the asset will not depreciate.
 This method cannot apply on assets which are directly not used in production.
Recommendation regarding best method
Straight line method could not provide true cost of use of asset and units of production method
cannot be applied to all assets. Hence, it can be concluded that double declining method of
depreciation is the best method for the Burley Designs because this method can be applied to all
assets and this method provides true cost of use of the asset.
3 Units of Production Depreciation Method - Explanation and Examples. (2017). Accounting-
simplified.com. Retrieved 15 August 2017, from
http://accounting-simplified.com/financial/fixed-assets/depreciation-methods/units-of-
production.html