The accounting procedure of allocating the acquisition cost of long-lived assets such as equipment and buildings as an expense over the period of use (the useful life). Typical methods are the straight-line and declining-balance methods.
Japanese name: 減価償却
Depreciation appears in 6 practice questions across 2 topics, including Business Strategy and Accounting Basics, Semiconductor industry and market.
Manufacturing equipment and buildings are used to generate sales not only in the year of purchase but over many years. So instead of expensing the acquisition cost all at once in the year of purchase, it is expensed little by little over the useful life to match the revenue of each year. The amount expensed each year is the depreciation expense, and the acquisition cost minus accumulated depreciation is the book value. Land is considered not to lose value through use, so it is not depreciated.
The straight-line method depreciates the same amount every year: annual depreciation is (acquisition cost − residual value) ÷ useful life. The declining-balance method multiplies the book value at the beginning of each year by the same rate, so the expense is largest in the first years and shrinks over time. Under Japanese tax rules, the declining-balance method switches to equal annual amounts from the year the depreciation would fall below a set level (the guaranteed depreciation amount).
In a semiconductor fab, investment in manufacturing equipment is very large, so depreciation makes up a large part of costs. Depreciation is an expense that involves no cash outflow, so cash flow from operating activities is larger than profit by the amount of depreciation added back. For this reason, in equipment-heavy industries, people often look not only at profit but also at indicators with depreciation added back and at cash flow.
Answer: B. ¥3.6 million
The declining-balance method multiplies the book value at the beginning of each year by the same rate to get the depreciation for that year. In year 1 it is 10 × 0.4 = ¥4 million, leaving a book value of ¥6 million; in year 2 it is 6 × 0.4 = ¥2.4 million, leaving a book value of 6 − 2.4 = ¥3.6 million. The expense is largest in the first years and shrinks over time, which is considered closer to reality for equipment whose value falls quickly because technology advances fast.
No. The cash was paid when the equipment was purchased, and depreciation is the procedure of allocating that amount as an expense to later years. That is why, in the cash flow statement, depreciation is added back to profit to obtain cash flow from operating activities.
The total expensed over the whole useful life is the same; what differs is how it is allocated to each year. The declining-balance method has larger expenses in the first years, so profit and tax are lower early on, while the straight-line method keeps the annual expense constant, so profit is steadier. The method is chosen according to accounting standards and tax rules and to how the asset loses value.
The declining-balance method multiplies the book value at the beginning of each year by the same rate to get the depreciation for that year.
Manufacturing equipment with an acquisition cost of ¥10 mil…Fab costs are dominated by fixed costs incurred regardless of output, such as depreciation of expensive equipment and buildings.
Fabs place particular emphasis on keeping tool utilization …The price of the equipment leaves as cash in the year of purchase, but in the income statement it is spread as an expense over the useful life through depreciation.
A semiconductor manufacturer bought new manufacturing equip…Fixed costs are incurred in a constant amount each period regardless of production volume, such as depreciation of equipment and buildings, rent and the salaries of permanent employees.
Among the costs of a semiconductor fab, which is generally …The straight-line method allocates the same amount as an expense every year, so annual depreciation is (12 − 0) ÷ 5 = ¥2.4 million.
An inspection system with an acquisition cost of ¥12 millio…As an Amazon Associate I earn from qualifying purchases.
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