This set of Industrial Engineering Multiple Choice Questions & Answers (MCQs) focuses on “Cost Accounting and Control – Depreciation”.

1. Which of the following mathematical equation is correct to find the depreciation rate(x) according to the reducing balance method?

a) x = 1 + Life period × \(\sqrt [1]{\frac {residual \, value}{Initial \, value}}\)

b) x = 1 – Life period × \(\sqrt [1]{\frac {residual \, value}{Initial \, value}}\)

c) x = 1 – \(\sqrt [Life \, period]{\frac {residual \, value}{Initial \, value}}\)

d) x = 1 + \(\sqrt [Life \, period]{\frac {residual \, value}{Initial \, value}}\)

View Answer

Explanation: Depreciation rate(x) depends on the parameters like residual value, initial cost, life period.

These parameters are related as follows:

Depreciation rate = 1 – \(\sqrt [Life \, period]{\frac {residual \, value}{Initial \, value}}\)

2. A truck was purchased for Rs. 96000/- whose estimated life period is 10 years. The residual value of the truck of the life period is Rs. 24000. Use the reducing balance method, calculate the depreciation rate.

a) 21.94%

b) 94.12%

c) 94.21%

d) 12.94%

View Answer

Explanation: Given,

Cost of the truck = C (say) = Rs. 96000

Life period = N = 10 years

Residual value = R = Rs. 24000

We know that,

Depreciation rate = 1 – \(\sqrt [Life \, period]{\frac {residual \, value}{Initial \, value}}\)

x = 1 – \(\sqrt [10]{\frac {24000}{96000}}\) = 0.1294 = 12.94%

3. Calculate the depreciation fund(in Rs. ) at the end of two years with the following data.

Cost of the truck = Rs. 96000

Life period = 10 years

Residual value = Rs. 24000

Depreciation rate = 12.94%

a) 32000

b) 29000

c) 23237

d) 20000

View Answer

Explanation: Given,

Cost of the truck = C (say) = Rs. 96000

Life period = N = 10 years

Residual value = R = Rs. 24000

We know that,

The depreciation fund at the end of two years = D

_{F}= C [1 – (1 – x)

^{2}] = 96000 [1 – (1 – 0.1294)

^{2}]

= Rs. 23237.3

4. Match the following.

p) Fixed installment method i) Diminishing balance method q) Reducing balance method ii) Straight line method r) Proportional method s) Percentage on book value method

a) p – ii, q – i, r – ii, s – i

b) p – ii, q – ii, r – i, s – i

c) p – i, q – ii, r – ii, s – i

d) p – ii, q – i, r – i, s – ii

View Answer

Explanation: Straight line method is also known as the fixed installment method or proportional method. Diminishing balance method is also known as reducing balance method or Percentage on the book value method.

5. Which method considers the loss of value of an asset is directly proportional to its life period?

a) Straight line method

b) Diminishing balance method

c) Sinking fund method

d) Machine hour basis method

View Answer

Explanation: Straight line method assumes the loss of value of an asset is directly proportional to its life period. In this method charges of maintenance and repairs are neglected.

6. Find the depreciation rate when the value of an asset is Rs. 250000 and number of production hours is 87600.

a) 2.85

b) 1

c) 2

d) 2.5

View Answer

Explanation: Given,

Value of an asset = Rs. 250000

No of production hours = 87600

Depreciation rate = \(\frac {250000}{87600}\) = Rs. 2.85/hr

7. Which method neglects maintenance and repair charges?

a) Insurance policy method

b) Sinking fund method

c) Reducing balance method

d) Straight line method

View Answer

Explanation: Fixed installment method which is also known as straight line method does not take the amount/expenditure spent on the maintenance and repairs works. Hence, depreciation charges are fixed.

8. Which method assumes that the asset depreciates rapidly at early stages and later on slowly?

a) Insurance policy method

b) Sinking fund method

c) Reducing balance method

d) Straight line method

View Answer

Explanation: Reducing balance method assumes that the asset depreciates rapidly at the early stages and later on slowly i.e., during the early stages, when the repairs and maintenance are less, depreciation is more.

9. Which methods takes a fixed percentage of the current book value as the depreciation?

a) Insurance policy method

b) Sinking fund method

c) Reducing balance method

d) Straight line method

View Answer

Explanation: Reducing balance method uses a fixed percentage of the current book value as the depreciation and it is calculated using the below relation:

Depreciation rate = 1 – \(\sqrt [Life \, period]{\frac {residual \, value}{Initial \, value}}\)

10. Which method sets the depreciation fund aside from the company’s annual profits?

a) Insurance policy method

b) Sinking fund method

c) Reducing balance method

d) Straight line method

View Answer

Explanation: In Sinking fund method, depreciation fund is set aside which is usually invested outside to earn interest to replace the amount at the end of the estimated life.

11. What is the formula to calculate the rate of depreciation according to the sinking fund method?

a) D = \(\frac {R(C-S)}{(1-R)^N-1}\)

b) D = \(\frac {R(C+S)}{(1+R)^N-1}\)

c) D = \(\frac {R(C-S)}{(1+R)^N-1}\)

d) D = \(\frac {R(C-S)}{(1+R)^N+1}\)

View Answer

Explanation: The rate of depreciation in the sinking fund method is calculated using the below mathematical relation.

D = \(\frac {R(C-S)}{(1+R)^N-1}\)

Where,

D = Rate of depreciation per year

R = Rate of interest on the accumulated fund

C = Initial cost of the asset

S = Scrap or residual value

N = Useful life period of the asset

12. Calculate the annual rate of depreciation using the sinking fund method considering the following data.

Cost of the machine (C) is Rs. 300000; scrap value (S) as Rs. 100000 at the end of 5 years; the rate of interest (R) as 5%.

a) Rs. 33194

b) Rs. 34194

c) Rs. 32194

d) Rs. 36194

View Answer

Explanation: Given,

Cost of machine (C) = Rs. 300000

Scrap value (S) = Rs. 100000

Life period = N = 5 years

Rate of interest (R) = 5%

We know that,

D = \(\frac {R(C-S)}{(1+R)^N-1} = \frac {0.05(300000-100000)}{(1+0.05)^5-1}\) = Rs. 36194.95

13. What is defined as the reduction in the efficiency and the value of machine or asset with time?

a) Scrap value

b) Book value

c) Depreciation

d) Sinking fund

View Answer

Explanation: When efficiency of a machine or any asset decreases, it needs to be replaced by a new one and it incurs some cost. The money required for such replacement is charged as depreciation.

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