Hi I was just wondering with regards to Income statement, what happens if I put the depreciation on machinery for example, under the admin expense instead of putting in the calculation of cost of sales, but the result at the end would be the same its just whether deducting the depreciation earlier (before calculating the gross profit) or later (after calculating the gross profit). In terms of marking would there be a difference? Because i saw some past papers some treat it as an admin expense but some do the deduction in the cost of sales. Thanks
There are arguments for and against this, some argue that depreciation should be treated as a fixed cost, and is not dependant on the level of production, since its just a fixed linear charge and is not a function of production levels. But this however violates the matching concept because the charge should be paired with the cost of generating the sales (since the initial cost of the non current asset is just being written off over time). It would be best to stick with the definition given in the notes i think. As for marking i think if you clearly state that you believe it's a fixed cost then it shouldnt be a problem but this will mess things up if your asked to calculate gross profit margin and form an opinion on somthing, so id definetly include it under cost of sales.
Treatment Of depreciation hi both of the treatments are correct..logically, depreciation when put under cost of sales..this depreciation is mainly being charged on the factory,other assets --which have a direct link with the manufacturing process..so appropriately it's being charged..On the other hand, when it comes under admin expense or one may say office expense this has an indirect bearing on the profits ..hence being charged as an indirect expense..different ways of treating depreciation is basically due to Matching Principle in accounting practices.
