How do I calculate the cost per usage of a machine?

Question

If you buy a machine for 10.000 dollars, which costs as a yearly write-off 2000 dollars, how do I calculate the cost per usage of a machine? Do you just divide the the yearly write-off by the times you use it per year? Or do you divide the yearly write-off by the times you potentially could use it per year? How do you take into account the wear and tear/loss of value of using it? Or is there some other way?

The machine is used in diagnostic medicine. I'm trying to calculate how much 1 test costs.

Is it just 2000/(Number of times used per year)?

Answer 1

Correct approach: there is reliable information (from the vendor and/or from past experience), that the machine can perform $T$ number of tests in total before being scrapped or taken out of service. Then the cost of the machine per se allocated to the execution of one test is $10.000 / T$.

In the OP's case, a straight-line depreciation method is applied, writing-off $2.000$ per year. The problem here in the calculation $2.000/T_i$ for year $i$, is that next year, if the number of tests is more/less, one will get a different cost allocation of the value of the machine on a single test -and it will be misleading. So for economic-costing purposes this is not advised. But for purposes of reconciliation with accounting practice year-by-year, then one could accept the artificial variation, if one cannot apply the correct approach.

A mitigating approach, if historical data exist, is to take "average yearly tests performed", and divide $2.000$ with this average.

Answer 2

For plain accounting purpose, @bobu5678 is a common practice.

If your intention is to justify something like Return On Investment(ROI), then this can be pretty tricky.

E.g.

1. Maintenance cost, e.g. electricity, replacement parts, cleanup/lubricants.
2. Should you rent the machine?
3. The cost of the machine in the 1 year time spend versus outsource the products. Or can you do otherwise, take others people outsource to make full use of the machine.
4. Upgrade and obsolescent

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You can use conservative formula

(interest rates x purchase cost)/write-off period + write off rates + operating cost + maintenance cost) / total usage

Sometime you may need to add up tangible or intangible benefits.

So in business, tools usage costing is not as simple as purchase and divide.

Answer 3

Accounting guidelines determine how you amortize the cost of the machine, typically straight line over 5 years. Your cost per usage is a metric that you figure for your own purposes, you're mixing apples and oranges.