The Cost Of Shrinking Equipment Including Fixed Cost Fees, Here's The Explanation

Accounting illustration (Unsplash)

YOGYAKARTA Of the many fixed costs that must be incurred by the company, the cost of shrinking is one of them. The cost of this shrinkage usually occurs in the assets of the goods owned. However, there are also those who say that the cost of shrinking the equipment includes the cost of mixed costs. Lau what is the actual position of the shrinkage cost?

As the name suggests, the cost of shrinking is the cost that must be incurred by the company for the shrinkage of assets owned. The shrinkage can also be understood as a reduction in economic value of an item, including in production tools.

Shrinks can occur in fixed assets, such as production machines, operational vehicles, or supporting technology such as cellphones, computers, and so on.

The emergence of the cost of shrinkage in the device occurs due to the reduced benefits of a tool used from time to time. Usually the shrinkage of this tool will continue to decrease from year to year. The longer the tool is used, there will be a reduction in benefits accompanied by a decrease in costs.

The cost of shrinking the equipment is included in the fixed cost category because its existence remains there and is always there every year as long as the tool continues to be used, not sold, or used to run out (rust, destroyed, and so on).

There are several reasons why the cost of shrinking tools is included in the fixed cost category, namely as follows.

The value of the equipment owned by the company continues to decrease at any time. This happens because the equipment will experience a decline in quality which has an impact on performance, for example, there is wear in the tool, left behind with the latest technology, damaged, and so on.

The amount of production produced by the company's tools does not have an impact on the cost of shrinking. This means that no matter how many companies are able to produce goods, the cost of shrinking remains the same.

Production tools include long-term investments whose benefits are biased for several periods.

Even though it includes fixed costs, the cost of shrinking the equipment can also be included in variable costs. This happens to the method of shrinking the production unit, when the cost of shrinking is calculated from the number of units produced.

However, the cost of shrinkage of tools is more appropriate if it is included in the fixed cost category because it is able to reflect a decrease in the value of assets that occur naturally and consistently, not being affected by fluctuations in production activity.

There are several methods that can be used to calculate the cost of shrinkage of the tool, namely as follows.

This method is the simplest, namely calculating the cost of shrinking with the asset acquisition price formula minus the expected remaining value, then divided by the estimated term of benefit for these assets. Here's the formula.

This method is used to increase the number of shrinkages of tools at the beginning of the period of use of tool assets. The formula for the method of shrinking double declining tools is as follows.

This method is used based on the number of units of goods that have been produced. The formula that can be used is as follows.

The conclusion is the cost of shrinking tools including fixed costs. Visit VOI.id to get other interesting information.