Depreciation ($8,000 + 5 years) Insurance .... Garage rent. Automobile tax and license Variabie operating cost... $1,600 $1,200 ..... ... $360 ..... ..... $40 $0.14 per mile ..... .....
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Identification of Relevant Costs
Kristen Lu purchased a used automobile for $8,000 at the beginning of last year and incurred the following operating costs:
The variable operating cost consists of gasoline, oil, tires, maintenance, and repairs. Kristen estimates that, at her current rate of usage, the car will have zero resale value in five years, so the annual straight-line
Required:
1. Kristen drove the car 10,000 miles last year. Compute the average cost per mile of owning and operating the car.
2. Kristen is unsure about whether she should use her own car or rent a car to go on an extended cross-country trip for two weeks during spring break. What costs above are relevant in this decision? Explain.
3. Kristen is thinking about buying an expensive sports car to replace the car she bought last year. She would drive the same number of miles regardless of which car she owns and would rent the same parking space. The sports car’s variable operating costs would be roughly the same as the variable operating costs of her old car. However, her insurance and automobile tax and license costs would go up. What costs are relevant in estimating the incremental cost of owning the more expensive car? Explain.
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