How to calculate relative benefit depreciation with several investments

[rashika]

I would like to calculate the relative benefit depreciation for inventory of a producing firm.
The starting inventory is for example 200 items. And the inventory cycle 3 periods. An important assumption is, that the inventory is strictly decreasing. So we have in period 1 200 items, in period 2 100 (e.g. 100 produced and 200 items sold) and in period 3 0 items (e.g. 100 produced and 200 items sold).
Now I would like to calculate the relative benefit deprecation the inventory in each period. Is that possible?

 

[Counterofbeans]

I'm not sure I even understand what you are asking.

For starters, we don't depreciate inventory.

It appears you have a question about inventory usage, but I'm not sure what you are trying to calculate.

What business are you in?

 

[rashika]

It is a theoretical problem. Let's say the product has a very short life cycle so we have to depreciate them (if not sold). The historical costs are capitalized.

I have the following formula to calculate the annual depreciation with relative benefit-rule:

d_t=(-〖cf〗_0 ) *〖cf〗_t / (∑_(j=1)〖cf〗_j / (1+r)^j )- r * 〖BV〗_(t-1)

where 〖cf〗_0 is the investment

My problem is, that the BookValue (BV) is not only affected by the depreciation (t-1), but also by the change in inventory (some items are sold, so the inventory is decreasing). Now I'm not sure if this rule still works.

 

[Counterofbeans]

We simply don't depreciate inventory, even if it has a very short life cycle. It sounds like what you have is a serious & consistent Lower of Cost or Market ("LCM") issue.

LCM is how we deal with damage, spoilage, obsolescence, changes in the market price, etc. when it comes to inventory.

You should be selling those inventory items and relieving them at whatever cost flow assumption that you selected (FIFO, Specific Identification, Moving Average, etc.), then re-evaluating the inventory for LCM, probably on a monthly basis.

LCM has specific rules, but it's really fairly easy. Just compare the carrying cost to the replacement cost, as defined, and that replacement cost has certain limits, both a ceiling and a floor. Then, simply adjust inventory to LCM if it's lower than the carrying cost. LCM is recorded as a Debit to some sort of cost of sales account and a Credit to Inventory/Inventory Reserve account.

I can't think of a single scenario where I would attempt to "depreciate" inventory, even if I was attempting to calculate the replacement cost with that model. You need to calculate the ceiling and floor as well. Unless, of course, we're talking a complete write-off/reserve for such inventory, but that has nothing to do with depreciating it or not.