Use Depreciation Below Zero Net Book Value for Better Product Costing
- by Gaurav Aggarwal, Finance Specialist, Agilent Technologies
- August 29, 2014
Many organizations face scenarios in which they have some assets used even after the net book value (NBV) reaches zero. Once the NBV reaches zero, no more booking happens in accounting for legal reporting. However, from a management point of view, the depreciation needs to be accounted into cost estimation even if the NBV is below zero to ensure that the product cost estimate has consistent factoring for depreciation. When you replace this asset, the new asset also has depreciation. Configuring settings for this depreciation below zero requirements in your SAP system enables you to make more realistic cost estimates.
By reading this article, you will learn how to:
- Determine what setup is needed for enabling depreciation below zero
Every fixed asset being used in an organization has a defined useful life (i.e., the time span for which the fixed asset is expected to be used). Based on the fixed asset’s useful life, an organization expenses out a portion of the fixed asset’s cost into its profit and loss (P&L) in the form of depreciation. Furthermore, this depreciation also becomes part of the cost of manufacturing, as the product should contain all the direct or indirect costs associated with manufacturing it.
Depreciation below zero is one of the most desired requirements in asset accounting and product costing. To help you better understand depreciation below zero, consider a scenario in which you acquired fixed assets worth US $1,000,000 with a useful life of five years. Each year you calculate the depreciation of US $200,000 (assuming a straight line depreciation method) and this depreciation forms part of the product cost. At the end of the fifth year, the asset is not disposed of and you use it for two more years.
Therefore, for the sixth and seventh years there would be no depreciation charged in the legal accounting because negative net book value (NBV) is not allowed in legal books. Assume that in the eighth year, you dispose of the assets, purchase a new one, and start calculating the depreciation again from the eighth year in legal accounting.
As you have seen, that product cost does not have a depreciation figure for the sixth and seventh years, thereby affecting consistency of your product cost and leading to incorrect managerial decisions, such as sale price determination for the product. I explain a procedure that enables you to account for that depreciation below zero NBV (i.e., in the sixth and seventh year in my example) into your product cost.
SAP provides various settings to handle the depreciation below zero requirement that has evolved with different versions of SAP ERP. I explain the concept, various customizations, and also the custom logic that might be needed using a user exit in SAP ERP Central Component (ECC) 5.0 or the Business Add-In (BAdI) in ERP Central Component (ECC) 6.0 (up to enhancement package 5.0).
These customized settings help your organization to do budgeting for product costing more accurately than without them, as without these settings your budget has only the depreciation based on main books that allow depreciation up to zero NBV only.
I focus on the depreciation below zero concept, so I assume that the readers know the underlying processes, such as asset master creation, depreciation run, budgeting, and product costing. I also assume that the readers know the basic setup for asset accounting and product costing in their systems.
Would you like to see this full item?