Depreciation: A Rising Cost of Processing Food Products

Abstract

T OTAL DEPRECIATION charges made by food processing corporations were almost as large as their total net income after taxes in 1959 (Figure 1).1 The difference between the two has been narrowing during the last decade. For all industries in the economy, depreciation exceeded profits (after taxes) during both 1958 and 1959. Depreciation is an imputed cost. It may appear to be arbitrarily determined by accounting conventions. Nevertheless, it is a cost of doing business to the extent that it measures capital consumption. It is in the context of a marketing cost that I will examine trends and factors behind the rise in depreciation. Depreciation costs of food processing corporations more than doubled between 1949 and 1959. Since 1939, they increased more than fourfold. Depreciation per dollar of total receipts declined during World War II. From a low point of 0.7 cents per dollar of total receipts in 1946, depreciation rose steadily to 1.5 cents per dollar in 1959. This rise represents a 5.5 percent annual average rate of increase. Why is depreciation rising? Is it because of large postwar purchases of new machinery and equipment? Is it owed to the adoption of rapid methods of depreciation? Or, are assets being depreciated in a shorter period of time? This paper will be concerned with measuring the importance of these various forces. Original cost times the annual rate of write-off is the method of computing annual depreciation. The rise in total depreciation costs, thus, must be due either to a rise in total cost of depreciable assets, an increase in the rate of write-off, or some combination of the two. Gross depreciable assets of food processing corporations increased only slightly between 1939 and 1946. But since 1946, the rise has been steadily upward. Between 1946 and 1959 the annual rate of increase was 7.6 percent.2 This rise obviously has pushed total depreciation charges upward. But, the rise in depreciable assets per dollar of total receipts amounted