Definition: Depreciable cost, also called the basis for depreciation, is the amount of cost that can be depreciated on an asset over time. The depreciable cost is calculated by subtracting the salvage value of an asset from its cost.
What Does Depreciable Cost Mean?
Notice I said cost and not purchase price. The depreciable cost is not solely based on the purchase price of an asset. Other costs like repairs, upgrades, and taxes also attribute to the cost of an asset. The cost of an asset is the total price to acquire an asset and make it ready for use.
Take a manufacturer for example. It purchases a large piece of machinery for $100,000 to put in its production plant. The machine is so big that it can’t fit through the doors. It has to be taken apart taken apart to get into the building and reassembled in place. It costs the company $10,000 to have the machine torn down and put back together again. This cost is added to the original purchase price of the machine bringing the total cost to $110,000.
Based on past history, management thinks this machine will probably last about 10 years and will have a salvage value of about $15,000. This means the depreciable cost would be $95,000 ($110,000 – $15,000). In other words, the company can depreciate $95,000 of the machine’s cost over time. It cannot be fully depreciated.
Managerial accountants also use the depreciable cost to compute the amount of depreciation taken each year. Straight-line depreciation is calculated by dividing the depreciable cost by the useful life of the asset. In our plant asset example, the straight-line depreciation per year would be $9,500 ($95,000 / 10 years). This means the assets recognize $9,500 of cost per year for ten years.