What is Periodic Depletion Charge? Factors affecting Depletion charge

periodic depletion charge

What is Periodic Depletion Charge?

Periodic Depletion Charge refers to the lessening in the value of the natural resources due to extraction or use of its products. Fixed assets which results in depletion are the wasting assets. Some of the examples are lands which contains natural deposits of metals, coal, oil, gas, clay, cement, etc.

Decrease in the value of wasting assets charge to the cost of production. The concept of depletion restricts to minerals only.

Factors affecting the Periodic Depletion Charge

There are four factors that affect periodic depletion charge which are as follows –

Cost

If a property is acquired by way of purchase, the depletion charge is the price paid for the entire property less the value of any property plant equipment, machinery or the surface rights required.

Residual Value

There is possibility that the surface of natural resource is being used for other than extraction purpose. So if the property has residual value, subtract it from the cost in order to determine the depletion amount.

Units Recoverable

It is not possible to remove all the wasting assets economically. There are coal deposits which are not enough worthy to mine them. Units recoverable is meant the number of units of the product which it is expected may be removed profitably.

Units Recovered

The total number of units recovered refers to those extracted in any given length of time.

Computation of Depletion Charge

The formula for computing depletion charge is as follows –

Unit Depletion Charge = (Cost – Residual Value)/ Units Recoverable

Periodic Depletion Charge = Unit depletion Charge × Units recover in the period

Depletion Charge Formula

  • Cost of ore land is Rs. 1,00,00,000
  • 2,50,000 tons to be recoverable
  • 30,000 tons removed in the first year.
  • No additional capital expenditure
  • No residual value
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