Press yearly depreciation: 3 steps for bid rates

Key takeaways

• Record the machine's full cost before calculating depreciation.
• Keep the salvage subtraction visible on your worksheet.
• Divide the depreciable base by the economic life.
• Use documented productive hours to turn yearly depreciation into an hourly rate.

This post walks through the three steps. We use a worked example from a standard accounting textbook, a printing press, so the numbers are concrete. Once you have the yearly figure, the last section shows how to turn it into an hourly or daily rate. The method is the same for a plotter, a press brake, a skid steer, or a wrap machine. Only the numbers change.

Treat the result as a planning figure. Your accountant's schedule and your tax rules may differ from the simple method here, so check your rate with the person who keeps your books before you submit.

What you need before you start

You need three pieces of information about the machine. Get them written down before you touch the calculator.

The first is the total cost of the machine. That means the price you paid plus any other cost you had to pay to get the machine into service. The second is the salvage value, which is what you expect the machine to be worth at the end of its useful life. The third is the economic life, which is how many years you expect the machine to stay productive for your work.

The textbook example we use comes from the OpenStax book Principles of Accounting, Volume 1: Financial Accounting. Its section on depreciation methods opens with a clear setup: " Assume that on January 1, 2019, Kenzie Company bought a printing press for $54,000. " The same section adds an estimate for the end of the press's life: " Based on experience, Kenzie Company anticipates a salvage value of $10,000. "

Those two facts, plus a life of five years, are all the inputs the example needs. Notice that the salvage value is an estimate. It is based on experience with machines like this one, not a number you can look up on a price list the day you buy. Be honest with it. A press that you expect to be scrap in five years should carry a low salvage value. A press that holds its worth well in the used market can carry a higher one.

It helps to keep a small worksheet for each machine. Write down the purchase date, the purchase price, every other cost you capitalized, your salvage estimate, and your life estimate. When the numbers change, you will see it on the sheet rather than trying to remember it later.

Step 1: find the total cost of the machine

The first step is to get the full cost, not just the sticker price. Depreciation spreads what you paid for the asset, and it is the asset's full cost that gets spread out. Some costs that come with a machine belong in that total, and some do not.

In general, costs that bring the machine to the point where you can use it are part of the cost. Costs that keep the machine running after that are not. The OpenStax example makes the line clear when it describes what happens to upkeep. It says that " any costs for maintaining or repairing the equipment would be treated as regular expenses, so the total cost would be $58,000."

Look at what that tells you. The press cost $54,000 at purchase, but the total cost the example spreads out is $58,000. Maintenance and repairs are not added to that total. They are expenses you record as you go, in the year they happen.

For your own bid work, make a list. Put the purchase price at the top. Under it, list each cost that was needed to get the machine into working condition, such as delivery, rigging, or installation, and add them together. Leave out the routine costs of running the machine, such as ink, plates, power, and service calls. Those costs belong in your job cost, not in the machine's depreciation.

Then write the total at the bottom of the list. In the example, that total is $58,000. That is the number you carry into Step 2.

A quick check helps here. If your total cost is much higher than the purchase price and you cannot name the extra items, go back and look at the invoices. A repair booked to the asset by mistake is one way this happens, and it makes every hour of use look more expensive than it is. Keep the asset total for things that are part of the machine's setup, and keep repairs out.

Step 2: take off the salvage value

The second step turns the total cost into the amount you will actually depreciate. You do this by subtracting the salvage value from the total cost. The result is called the depreciable base, and it is the part of the machine's cost you expect to use up while you run it.

The reason is simple. If you expect to sell or scrap the machine for a certain amount at the end, you will recover that amount, so you do not need to spread it across your work. Only the part that will be consumed needs to go into your rate.

The OpenStax example arrives at the same base: after allowing for " an anticipated salvage value of $10,000 in five years, the business could take $48,000 in depreciation over the machine's economic life. "

So the arithmetic is:

• Total cost: $58,000
• Less salvage value: $10,000
• Depreciable base: $48,000

Write it on your worksheet exactly like that. If you carry the full $58,000 into the rate, you are charging your customers to pay for the machine's value at the end, and the bid will look too expensive for no reason. One line of subtraction prevents the error.

The salvage estimate needs the same care as the other inputs. Ask yourself what you would realistically get for the machine after the years you plan to run it. Do not use the price it sold for new, and do not use a number you wish were true. If you have sold similar machines before, use those results. If you have not, ask a dealer or an appraiser for a rough figure and write down where the number came from. That way, when you revisit the rate next year, you will know whether the estimate still holds.

Step 3: divide by the economic life

The third step gives you the yearly depreciation. Divide the depreciable base by the economic life, which is the number of years you expect the machine to be productive. This is the straight-line method, the simplest way to spread a cost evenly over time.

The OpenStax example does exactly this: " Therefore, we must determine the yearly depreciation expense by dividing the depreciable base of $48,000 by the economic life of five years, giving an annual depreciation expense of $9,600. "

The arithmetic is:

• Depreciable base: $48,000
• Divided by economic life: 5 years
• Yearly depreciation: $9,600

Choosing the economic life takes the most judgment. It is not the same as how long the machine keeps running. A press may run for decades, but if the technology will be outdated in five years, five years is the honest life for your rate. Pick the life that matches your plan, and write the reason down.

Illustrative example: a short economic life

For illustration, assume a machine has a total cost of $10,000, a salvage value of $0 and an economic life of 1 year. Subtracting $0 leaves a depreciable base of $10,000. Dividing by 1 gives yearly depreciation of $10,000. At the end of that period, its book value is $0. These are illustrative inputs, not recommended estimates for your press.

Check the answer with the book value

Before you trust the yearly figure, check it against the book value. Book value is what the machine is worth on your books after you have taken some depreciation. It starts at total cost and goes down by the yearly amount each year.

The OpenStax example shows the check. After the first year's entry, the press " would have a book value of $48,400. This is the original cost of $58,000 less the accumulated depreciation of $9,600. " The same source notes that " each year, the accumulated depreciation balance increases by $9,600, and the press's book value decreases by the same $9,600. "

Use this as a sanity check. After one year, the book value should be the total cost minus one year's depreciation. After five years, the book value should equal the salvage value. In the example, five years of $9,600 is $48,000, and $58,000 less $48,000 leaves $10,000, which is the salvage value we started with. If your numbers do not land on the salvage value at the end of the life, something in your arithmetic is off.

Turn the yearly figure into an hourly rate

The yearly depreciation is not yet a rate. A rate is a charge per hour or per day, and it depends on how much the machine runs. To get there, divide the yearly figure by the number of productive hours or days the machine will work in that year.

Use a letter for the hours until you have a real count from your own schedule:

• Yearly depreciation: the figure from Step 3
• Divided by productive hours per year: your own estimate, written as H
• Depreciation per hour: yearly depreciation divided by H

Use your schedule and past jobs to fill in H. Once you have H, the hourly figure is one division.

If the machine runs the same number of hours every working day, you can also get a daily figure. Or divide the yearly figure by the number of working days in the year, which gives the same idea from a different starting point.

Be honest about the hours. If you divide by more hours than the machine really runs, your depreciation per hour is too low, and the machine will not be paid for by the time it is worn out. If you divide by fewer hours than it really runs, you charge too much and may lose the bid. Use your real history where you have it, and be cautious where you do not.

Think about what the hours include. Setup, cleanup, and test runs may or may not count as machine time, and breakdowns or waiting for materials can eat hours too. Decide on the rule once, write it down, and apply it the same way every time.

A few more checks help. Does the hourly figure make sense when you multiply it by the hours on a typical job? Does the daily figure cover the depreciation on a day you run the machine in full? If a job uses the press for only a few minutes, does your rule still give a fair charge, or do you need a minimum charge? Answer these before you put the rate on a bid sheet.

Use the construction estimate audit to review the wider bid alongside this equipment calculation.

When a sale or disposal changes the picture

The example in this post assumes you keep the machine until the end of its life and recover the salvage value. In real life, you may sell a machine early, trade it in, or scrap it sooner than planned.

For federal contract costing, the Federal Acquisition Regulation generally assigns disposal gains and losses to the year they occur and the cost groups that carried the asset's depreciation or amortization, subject to paragraph (f) and the section's other qualifications. Its recognized gain limit is acquisition cost minus the undepreciated balance, using capitalized value for an asset acquired under a capital lease, except as specified in paragraphs (e)(2)(i) or (ii).

The sale price does not turn into unlimited profit in your cost records. If you bid government work, read the full section and talk to your contracts specialist before you rely on a disposal gain in your rates.

Common mistakes to avoid

Watch for these on your own worksheets.

The first is mixing up the cost and the price. Your depreciation is based on what the machine cost you, not on what you would charge a customer to use it. Your bid price for machine time is a separate decision that also covers profit, overhead, and risk.

Keep that pricing decision separate with the guide to markup and margin rates.

The second is leaving out the salvage value. It is tempting to skip the subtraction because it makes the arithmetic feel simpler, but the result is a rate that is too high. Keep the line on the worksheet every time.

The third is picking an economic life that does not match your plan. A life of twenty years on a machine you will replace in five will understate your rate. A life of two years on a machine that will run for a decade will overstate it. Match the life to what you actually expect.

The fourth is dividing by the wrong hours. Use realistic, documented hours, not the number of hours in a day or a number that makes the rate look nice. If you have no history yet, say so in your notes and revisit the rate after the first few jobs.

The fifth is forgetting to update. Machines change. You may buy a second press, change how many shifts you run, or see the market value of your equipment move. Review the worksheet each year and recalculate when the inputs change.

Put the method to work

Today, choose one machine and gather its purchase invoice and setup costs. Write down your salvage estimate, economic life and the reason for each estimate. Calculate its yearly depreciation, check the ending book value, and use your schedule to estimate productive hours before putting the rate on a bid.

Common questions

What is the press's yearly depreciation in the textbook example?

The press's yearly depreciation is $9,600 over its five-year economic life. Its depreciable base is $48,000.

Is depreciation the full equipment bid rate?

Depreciation is only part of the equipment bid rate. Running costs, overhead, profit and risk require separate consideration.

Should depreciation continue below salvage value?

This straight-line calculation stops at the estimated salvage value. Continued use alone does not extend the example's five-year depreciation period.