A General Mathematical Theory of Depreciation
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In the older treatments of depreciation the cost, or “theoretical selling price” of the product of a machine, was conceived of as determined causally by the addition of a number of items of which depreciation is one. In other words, depreciation was first computed by some rather arbitrary formula not involving the theoretical selling price, which was then found by the addition of depreciation to operating costs and division by quantity of output. It will be shown in this paper that depreciation and theoretical selling price must be computed simultaneously from a pair of equations which are frequently a bit complicated. The differences in the results obtained from the arbitrary and mathematical formulae are often very large.
KeywordsOperating Cost Unit Cost Discount Factor Operating Expense Fundamental Formula
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