Which of the following methods of calculating depreciation is manufacturing based? a. Straight-line. b. Declining-rate.
c. units-of activity. d. none of the above answer options are correct. When there is no straight-line method for computing depreciation, there are two alternatives for determining depreciation: a. a sales-tax basis and a production base. The difference between the two is the method by which the component of actual depreciated asset is re-applied for computing its depreciation over the period of ownership of the property. For the sales-tax basis, the component of actual depreciated asset is re-applied based on the current fair market value of the property immediately before the sale.
When there is no declining-balance method by which the depreciation can be applied, the basis is determined using the amount of depreciated income that can be realized from the sale of an identical property during the ownership period. Under the alternative of a sales-tax basis, if the property is sold after the last day of the current year the decedent’s basis is zero. Under the alternative of a production-based method of calculating depreciation, if the property is sold during the first day of the current year the decedent’s basis is equal to the fair market value of the property immediately before the sale. The specific number of days used in the second case for applying the sales tax depreciation order are called the carry-over date.
Under the first option of a manufacturing basis, the manufacturer’s gross revenue less the cost of good sold and factory overhead is used as the basis for computing the depreciation deduction. In case of option two, the manufacturer’s gross revenue and the cost of goods sold do not exceed the excess of factory overhead over the total amount of sales during the year. Under the alternative of a straight-line method of depreciation, the manufacturer’s gross revenue is the basis for computing the deduction. In case of option three, the manufacturer’s gross revenue and the sales volume of the product are used as the basis for computing the deduction.
Under the first option, manufacturing units are those that employ more than one employee. Under the second option, the actual or reasonable cost of production is used as basis. Under the third option, actual or reasonable cost is the largest percentage of actual cost applied to the total production of the item. Under the fourth option, reasonable costs are those expenses which relate primarily to improvement, replacement or repair of the property involved in producing the item. Under the fifth option, property used in producing the item can be deducted only if it was acquired with the intent to use it in producing the item. Other factors which have to be considered are whether the property is located at a place which is permanently fixed and which does not change in terms of location over a period of time.
The sixth option is the most simple of all the methods. It uses the indexing of property prices provided by the United States Bureau of Labor Statistics. This is a very good measure of which method is manufacturing based. As the name indicates, the index provides the price of similar articles in various industries throughout the period of time when the articles are manufactured. These prices are included to determine which of the two methods is applied.
The seventh option is also called the straight line method of determining depreciation. As the name implies, this option determines the cost of production by using the straight line method. As stated earlier, the straight line method is adopted so that the cost of production may be compared. This option may be subject to substantial limitations such as there may be a tendency for the costs to differ from year to year because of fluctuating economic conditions in the industry concerned. In such cases, the use of historical data becomes important.
The last option, which is referred to as the reasonable market price method is based on a reasonable market cost. For the period of manufacture, the cost of raw materials is taken into consideration. When the product is finally put to market, this represents the reasonable market price for the item. Generally, the second option wins the selection as manufacturing based because it is believed to be more accurate in terms of establishing the cost of production. However, if the second option is not properly controlled, the third option may prove to be the most suitable one.