Accounting theory and practice, Volume 2 (of 3) : a textbook for colleges and…

(a) Excessive and irregular strains (b) Interior causes of decay (c) Chemical action —all these being of greater or less effect, according to the time of daily usage and lack of periods of rest.”[29] [29] R. P. Bolton in “Power for Profit.” Policies as to Repairs Without doubt the most important single factor in the determination of the depreciation rate is the normal policy as to repairs and maintenance. Physical deterioration is constantly at work. If this is counteracted by a liberal maintenance policy, not only is more efficient service secured but a longer service life is thereby insured. As soon as repairs are needed, although the efficiency of the asset may not be immediately impaired, the _rate_ of deterioration is much accelerated unless the condition is corrected. Deterioration takes place day by day, but repairs obviously cannot be made at such short intervals—both because of the difficulty of detection and also because such a policy would not be economically practical. Every concern must consider its own peculiar problems and determine from these what shall constitute its normal repairs policy, and so far as possible this should be adhered to. The charges for repairs are bound to be of a more or less irregular character. Their handling is discussed on page 147. Regardless of what the established policy as to repairs may be, conditions are sure to arise which make strict adherence to it impossible. There may occasionally be lack of funds at the time repairs are customarily attended to; it may be impossible to get the expert labor needed or the parts to replace worn-out units; or, and of oftenest occurrence, the need of repairs may coincide with a period of intense activity when the plant is being worked to its limit and in consequence there is no opportunity for making repairs. It is clear that rates based on one shift and the normal use of equipment during eight hours would be inadequate for three shifts and twenty-four hours of use; for in addition to a threefold intensity of operation this makes impossible adherence to the normal repairs policy based on an eight-hour schedule. Depreciation Rate an Engineering Problem From the above discussion it is apparent that the determination of rates is essentially an engineering problem. The accountant, however, needs a knowledge of the fundamental considerations and requirements of fixing depreciation rates and an appreciation of the difficulties of the problem. As Henry Floy[30] says: “What engineer is able to foretell the misuse and neglect or care and high degree of maintenance that any given apparatus or ... property as a whole will receive, even during the next five or ten years, with vicissitudes of climate, load conditions, changes of management, and requirements of the public?” On the other hand, in the opinion of another prominent engineer, “Consideration of these matters (misuse, neglect, etc.) may eventually form the basis for a systematic appraisal of the probabilities of life, or average of the risks, which would provide a method for the insurance of the life of machinery.” [30] In “Value for Rate-Making.” The author does not attempt to discuss the relative merits of the two contentions other than to point out the fact that engineers are not discouraged in spite of the many contingencies and uncertainties inherent in the problem. They are constantly gathering data from which conclusions as to rates are being formed, the use of which is being compelled by regulating bodies. It is possible that the problem will ultimately be worked out on some kind of an insurance basis. Attitude of Regulatory Bodies At the present time the attitude of most regulatory bodies—public service boards, federal commissions, and tax officials—is well expressed by a regulation of the Public Utility Commission of New Jersey which says that, “Until otherwise prescribed, the amount estimated to be necessary to cover such wear and tear and obsolescence and inadequacy as have accrued during any month shall be based on a rule to be determined by the accounting corporation; such rule may be derived from a consideration of the said corporation’s history and experience. A general statement of the rule in use by each company, together with the general information upon which it is based, is to be filed with the Board of Public Utility Commissioners.” The trend at the present time is towards a more thorough supervision of depreciation rates on the part of many public service boards, and the future will undoubtedly see interesting developments. Methods of Handling Repairs Three distinct practices are met with in handling repairs and renewals on the books. The most general method is dictated by ease of application and rests on the theory of averages, viz.: that the amount of repairs annually recurring for depreciating equipment in all degrees of deterioration and all stages of decay and age is a fairly constant figure which secures an equitable distribution over the product of the different years. The larger the plant and the greater the variety of the equipment used, the more nearly does this work out as expected. Further consideration will be given to this point in the discussion in