Author Topic: Is depreciation a fixed cost or variable cost?  (Read 31 times)

Offline Repon

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Is depreciation a fixed cost or variable cost?
« on: September 30, 2019, 11:56:50 AM »
Is depreciation a fixed cost or variable cost?

Depreciation is a fixed cost, because it recurs in the same amount per period throughout the useful life of an asset. Depreciation cannot be considered a variable cost, since it does not vary with activity volume.  However, there is an exception. If a business employs a usage-based depreciation methodology, then depreciation will be incurred in a pattern that is more consistent with a variable cost.

For example, a logging machine is depreciated based on the number of hours that it is used, so that depreciation expense will vary with the number of trees cut. If these trees are then sold to generate revenue, then it can be said that the related depreciation behaves more like a variable cost than a fixed cost. However, usage-based depreciation systems are not commonly used, so in most cases depreciation cannot be considered a variable cost.

If depreciation is considered a fixed cost, then it is included in the numerator of the formula used to calculate the break even sales of a business, which is:

Total fixed expenses ÷ Contribution margin % = Break even sales

If depreciation is considered a variable cost, for which a case can be argued if usage-based depreciation is employed, then it is instead used to reduce the amount of the contribution margin percentage in the denominator of the equation.
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