A worked depreciation budget: the existing base with its roll-off, new assets from the month they enter service, and the conventions that move the number.
Depreciate each new asset from the month it is placed in service, not from the month the cash is spent or from the start of the year: monthly charge = cost ÷ useful life in months, times the months in service left in the budget year. On an illustrative $7.5m capex plan, that gives $648,333 of new depreciation, against $1,150,000 if each asset's full annual charge is budgeted. Add the existing base net of assets that become fully depreciated, and the year's charge is $3,328,333.
Worked in full in Financial Planning and Analysis by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Depreciation is the line FP&A teams most often budget with a plug: last year's charge plus a tenth of the capex budget, or the full annual charge on everything approved. Both are wrong in ways that matter, because depreciation sits between EBITDA and operating profit, and a $0.5m overstatement in the budget becomes a favourable variance every month that someone then has to explain. The correct build needs three inputs per asset (cost, in-service month, useful life) and one input for the existing base: when its assets run out.
| Asset | Cost ($) | In service (month) | Life (years) | Monthly charge ($) |
|---|---|---|---|---|
| Delivery vans | 600,000 | 1 | 5 | 10,000 |
| IT hardware refresh | 1,200,000 | 3 | 3 | 33,333 |
| Warehouse fit-out | 900,000 | 7 | 6 | 12,500 |
| Production line (spend from June) | 4,800,000 | 10 | 10 | 40,000 |
| Total | 7,500,000 | 95,833 |
The existing fixed asset register depreciates at $250,000 a month in January. A tranche of equipment charging $40,000 a month reaches the end of its life in April, so from May the base is $210,000 a month.
Existing depreciation = 250,000 × 4 + 210,000 × 8 = 1,000,000 + 1,680,000 = $2,680,000
Not 250,000 × 12 = $3,000,000, which keeps charging $320,000 on assets already written down to nil.
The roll-off comes from the fixed asset register: sort assets by the date their net book value reaches zero and sum the monthly charge that drops out each month. On an ageing asset base it is often the largest single movement in the depreciation budget, and it is invisible if the budget starts from the prior year's total.
Budget-year charge = (cost ÷ life in months) × (13 − in-service month), full-month convention
Vans: 10,000 × 12 = 120,000. IT: 33,333 × 10 = 333,333. Fit-out: 12,500 × 6 = 75,000. Line: 40,000 × 3 = 120,000.
New depreciation = $648,333; total budget = 2,680,000 + 648,333 = $3,328,333
Excel, per asset row: =Cost/LifeMonths*MAX(0,13-InServiceMonth)
The production line is the case that trips budgets up. Cash goes out from June, but the line sits in construction in progress, which is not depreciated, until it is commissioned in October. Starting the charge at the first payment adds $160,000 of depreciation (four extra months at $40,000) on an asset that is not yet available for use.
| Quarter | Depreciation |
|---|---|
| Q1 | 813,333 |
| Q2 | 800,000 |
| Q3 | 797,500 |
| Q4 | 917,500 |
| Year | 3,328,333 |
The profile is not flat. Q2 and Q3 dip below Q1 despite a full quarter of the IT refresh and the arrival of the fit-out, because the roll-off from May is larger than the additions; Q4 jumps when the production line starts. The monthly charge goes from $260,000 in January to $305,833 in December, and that exit run-rate, $3,670,000 a year, is the right starting point for next year's budget, not the $3,328,333 booked this year.
| Method | New assets | Total budget |
|---|---|---|
| Full month from in-service month | 648,333 | 3,328,333 |
| Mid-month (half a month in the first month) | 600,417 | 3,280,417 |
| Half-year convention | 575,000 | 3,255,000 |
| From first spend (CIP depreciated) | 808,333 | 3,488,333 |
| Full annual charge on all capex | 1,150,000 | 3,830,000 |
Use the convention the accounting policy uses, so that budget and actuals are built the same way; the mid-month and full-month answers differ by $47,917 here, which is a timing nuance. The half-year convention, common in tax computations, comes in lower on this plan because the vans and the IT refresh, in service from January and March, get six months instead of twelve and ten; that more than offsets the production line, which gets six months instead of three. On a plan weighted to the second half it would come in higher.
| In service | Months charged | Line depreciation | Total budget |
|---|---|---|---|
| July | 6 | 240,000 | 3,448,333 |
| October (base) | 3 | 120,000 | 3,328,333 |
| December | 1 | 40,000 | 3,248,333 |
| Next January | 0 | 0 | 3,208,333 |
A capex delay is a favourable depreciation variance and an unfavourable EBITDA one if the line was meant to produce. Reporting the first without the second flatters operating profit.
Budgeting the full annual charge on every approved project: $1,150,000 against $648,333, an overstatement of $501,667, or 77 per cent of the correct figure. With the existing base right, that budget is $3,830,000; start the base from 250,000 × 12 as well and it is $4,150,000, $821,667 above the correct $3,328,333. The year then shows a large favourable depreciation variance that has nothing to do with performance, and a forecast built from year-to-date actuals inherits the confusion.
Build depreciation asset by asset: the existing base month by month with its roll-off, plus each new asset from its in-service month at cost divided by life. Here that is $3,328,333 for the year and $305,833 a month by December. Phase it monthly like the rest of the P&L (the method is the same as phasing an annual budget for seasonality), and keep the in-service dates in the capex tracker so that a slip moves the charge automatically. The budget-to-actual framework this sits in is laid out in the free workbook for this case.
No. Depreciation starts when the asset is available for use. In the illustrative plan a $4.8m production line is paid from June but commissioned in October; charging from June adds $160,000 of depreciation, four months at $40,000, on an asset still in construction in progress.
Use the convention in the accounting policy, so budget and actuals match. On the illustrative $7.5m plan the full-month method gives $648,333 of new depreciation, mid-month $600,417 and half-year $575,000. The half-year figure is lower because the early assets lose more months than the late production line gains.
It is the monthly charge at the end of the year, annualised. In the illustrative case December depreciation is $305,833, or $3,670,000 a year, against $3,328,333 booked in the year. Next year's budget should start from the exit run-rate, then subtract roll-off and add new assets.
This article is one calculation from Financial Planning and Analysis. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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