What is Depreciation?

Depreciation simply means a reduction in the value of an asset over time, due in particular to wear and tear. For example, if you buy a mixer today, it lasts for five years then it finally packs up. In this case, the depreciation just means the slow death of that mixer.

What is the Cost of Depreciation?

The depreciated cost is the value of the equipment after its useful life is complete, reduced over time through depreciation. The depreciated cost method always allows for accounting records to show an asset at its current value as the value of the asset is constantly reduced by calculating the depreciation cost.

So, let’s list some of the equipment in our bakery that depreciates over time:

• The Mixer
• The Oven
• The Generator
• Fridge
• Freezer
• and any other major equipment you have in your bakery

So, Let’s say you buy your mixer N50,000. You use this mixer for 2 years and it packs up. The cost of the mixer as it dies slowly over several uses is your cost of depreciation. Yes, these things must be considered! And this applies to every piece of equipment that is involved in your business. If you don’t take this cost into consideration, when your equipment packs up, it would be hard to pull money out of the business to buy another.

In my own case, my major equipment includes;

Mixer 1 N90,000 (Life expectancy 2 years)

Depreciation per year= N90,000/2= N45,000

Mixer 2 N225,000 (Life expectancy 5 years)

Depreciation per year= N225,000/5= N45,000

Oven N650,000 (Life expectancy 5years)

Depreciation per year= N650,000/5= N130,000

Generator N120,000 (Life expectancy 4years)

Depreciation per year = N120,000/4= N30,000

So, depreciation per year on all this equipment will be

45k + 45k + 130k + 30k = 250k

Depreciation per month will 250k/12 months = N20,833

Depreciation per month is divided by the average number of cakes made per month.

So, depreciation on each cake N20,833/40 cakes = N520

Wow, interesting right😜 I hope I am not bursting some brains🤯

Now, get a book and calculate yours. In our ebook Cake Costing Workbook for Bakers, the cost of depreciation is explained explicitly as well as other hidden costs that makes up your total cost. Click HERE to learn more about the ebook,