Q It seems to me that if I depreciate my X
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vehicles over a number of years by the straight-line method this will give a misleading indication of the actual annual depreciation and leave no apparent residual value at the end of vehicle life. Could you suggest a more realistic method of depreciation?
Could you also suggest a way of allocating overheads among a mixed fleet?
A There are many ways of depreciating vehicles, though the straight-line method is the easiest. It is true that it takes no account of the diminishing depreciation as each vehicle ages — nor does it leave a residual value.
You might like to consider depreciating the vehicle by a set percentage each year. For instance, it could be considered that the vehicle depreciated by 25 per cent of its purchase price in the first year and 25 per cent of the sum remaining each subsequent year. Therefore a vehicle costing £10,000 would be worth £7500 at the end of 12 months, £7500 less £1875 = £5625 after two years and so on. So far as allocating overheads is concerned, you could add together the carrying capacity of the vehicles in your fleet and divide this into the total annual overheads incurred by your business. This will give you a figure of overheads per ton.
If you multiply the overhead figure per ton by the individual carrying capacity of each vehicle, this will provide a sensible allocation of overheads to each vehicle.
For instance, if you have five vehicles of 5-ton capacity and five of 10-ton capacity, the total capacity of the fleet is 75 tons. If the annual overheads incurred total £1500, then the overhead figure per ton is £20. Then each 5-ton vehicle can be allocated (5 x £20) £100 a year and each 10-ton vehicle £200 a year.