Allocate Machine Depreciation Costs in ERP for Real Profit

Why Machine Depreciation Costs Are Allocated Wrong in Most Factories

Depreciation is not a fixed monthly charge. It is a cost that should follow the work done by each machine. Yet most factories allocate it as a blanket overhead, splitting it by production value or labour hours. This hides which products or orders are truly profitable—and which are bleeding money.

For example, a dyeing machine running 24 hours a day for a high-value order should carry a higher depreciation share than one idling for a low-margin batch. Without this link, your costing is no better than a guess.

Facteno connects machine usage data to production orders, so depreciation follows the actual work. This is how you stop overcharging one product line to subsidise another.

How to Link Depreciation to Machine Usage, Not Just Time

Depreciation is often calculated by straight-line or reducing-balance methods, but these ignore when and how the machine is used. The key is to track:

• Actual runtime per shift, not just scheduled hours (a machine may run only 60% of a shift due to breakdowns or changeovers).
• Load type—some processes wear machines faster than others (e.g., high-pressure dyeing vs. light finishing).
• Downtime reasons—planned maintenance should not be treated the same as unplanned failures.

Facteno’s production module records these details per batch card. For instance, if Machine A runs for 40 hours on Order 1234 but only 10 hours on Order 5678, its depreciation should reflect that split. Without this, Order 5678 may appear artificially profitable.

Illustration: Say your embroidery machine costs $50,000 with a 5-year life and no residual value. Straight-line depreciation is $1,000 per month. But if it runs 80 hours on Order A and 20 hours on Order B in one month, Order A should carry 80% of that $1,000 ($800), and Order B just $200. A flat allocation would distort both orders’ true cost.

What Happens When You Allocate Depreciation by Calendar Month?

Allocating depreciation evenly across months—regardless of usage—creates two problems:

• Peak-season orders get undercosted. If a machine runs overtime in December to meet a holiday rush, its depreciation is still split 12 ways, not charged to those urgent orders.
• Slow months show fake profitability. A quiet January may look profitable because its orders carry only 1/12th of the machine’s annual depreciation, even if the machine was idle.

Facteno avoids this by tying depreciation to actual production logs. For example, if your knitting machine runs 150 hours in February but only 50 hours in March, February’s orders carry three times the depreciation of March’s. This matches reality.

Furthermore, some machines (like injection moulders) wear out faster under high pressure. Facteno lets you assign a “wear factor” to each process, so a high-pressure run on the same machine costs more in depreciation than a light cycle.

How to Include Indirect Costs Without Overcomplicating

Depreciation is not just about the machine’s book value. It also covers:

• Energy costs tied to runtime (a 24-hour dyehouse run uses more power and thus more depreciation-equivalent wear than a 4-hour batch).
• Maintenance linked to usage (oil changes every 50 hours, not every month).
• Spare parts consumption (some processes burn through belts or filters faster).

These are often lumped into “overhead,” but they move with machine activity. Facteno groups them under “machine-linked overheads” and allocates them alongside depreciation. For example, if your sewing line’s energy bill rises 20% in a month because of extra overtime, that extra cost is split across the orders running on that line.

Illustration: Say your fabric cutter’s energy cost is $2 per hour of runtime. If Order X uses 30 hours and Order Y uses 10 hours, Order X should carry $60 in energy-linked overhead, while Order Y carries $20. A flat allocation would hide this difference.

When to Allocate Depreciation by Department vs. by Order

Some factories allocate depreciation to departments (e.g., “Cutting Department” or “Finishing Department”) rather than individual orders. This works only if:

• All orders in the department use machines equally.
• You do not need to track profitability by product or customer.

For most textile or garment plants, this is too coarse. A department-level allocation hides which specific orders are dragging down margins. Facteno lets you choose:

• Order-level allocation (depreciation tied to batch cards).
• Department-level allocation (depreciation split by shift or machine group).
• A hybrid (e.g., 70% by order, 30% by department for shared utilities).

For example, if your stitching department has two machines—one for heavy denim and one for lightweight shirts—allocating depreciation by machine (not just department) shows that denim orders carry higher costs due to machine wear.

How to Handle Machines with Varying Lifespans

Not all machines depreciate at the same rate. A loom may last 10 years, while a high-speed embroidery head might need replacing every 3 years. Facteno lets you set custom depreciation curves per machine:

• Linear (equal depreciation each year).
• Accelerated (higher depreciation in early years, e.g., for fast-wear equipment).
• Usage-based (depreciation tied to hours run, not calendar time).

Illustration: Say your laminating machine has a 4-year life but wears out faster in the first 18 months. You might set 60% of its $40,000 cost to depreciate in Year 1, then 15% in Year 2, and the rest over Years 3–4. Facteno applies this curve to runtime data, so a machine running 2,000 hours in Year 1 carries more depreciation than one running the same hours in Year 3.

This prevents undercosting in the early years, when machines often fail unexpectedly.

What to Do Next Week: Pick One Machine and Test the Method

Do not try to overhaul every machine at once. Start with:

1. A single machine type (e.g., your most expensive loom or dyehouse press).
2. One month’s worth of runtime and production logs from Facteno’s production module.
3. A spreadsheet to manually calculate depreciation by order (use the formula: (Machine Cost × Depreciation Rate × Runtime on Order) ÷ Total Runtime).

Compare this to your current allocation. The gap shows where your old method was wrong. Once you’ve refined the approach for this machine, apply it to others.

If you’re not already using Facteno, the live demo lets you test how machine-linked depreciation works in a real plant setup. The Starter plan ($149/month) includes production tracking for up to 10 users, which covers most small to mid-sized factories.

Related reading: How to Allocate Machine Depreciation Costs in ERP for Accurate Profitability.