Understanding Depreciation for Electronic Manufacturers

Estimated reading time: 1 minute

As a PCB design engineer, your focus is on creating innovative, cost-effective designs. However, the financial aspects behind your designs—such as depreciation—play a significant role in the overall business. While depreciation may sound like "accounting speak," understanding it can help you make better decisions for your projects, especially when dealing with equipment, machinery, or even intangible assets like software licenses. Most people don’t fully understand the meaning of depreciation, especially young engineers and designers entering the field, yet when it comes to calculating the total cost to manufacture or the total cost to operate, it is an important financial piece of the total manufacturing cost algorithm. 

Here’s a breakdown of depreciation from a financial controller’s perspective, aimed at those less familiar with accounting.

Defining Depreciation

Depreciation is the process of allocating the cost of a tangible asset over its useful life. In other words, instead of recognizing the full equipment cost as an expense when purchased (e.g., a piece of equipment, a tool, or a machine), the expense is spread out over multiple years based on its expected useful life. This helps the financial reporting by preventing a large spike in expenses in the month the equipment was purchased.

For instance, if your company buys an $80,000 pick-and-place machine for PCB assembly that’s expected to last 10 years, you wouldn’t account for the entire $80,000 in the first year. Instead, you would record an expense of $8,000 each year over 10 years. This reflects how the machine is used to generate revenue over time.

To read this entire article, which appeared in the November 2024 issue of PCB007 Magazine, click here.