What Is Cost Depletion?

Cost depletion is one of two accounting methods used to allocate the costs of extracting natural resources, such as timber, minerals, and oil, and to record those costs as operating expenses to reduce 澳洲幸运5开奖号码历史查询:pretax income. It’s a method for allocating extraction costs, charged as an expense. The yearly depletion cost is based on the units extracted or used for a given 💧ꦅtime period.

The Formula for Cost Depletion Is:

 $\begin{aligned} &\text{Cost of depletion} = \frac{APV}{TR} \times U\\ &\textbf{where:}\\ &APV=\text{adjusted property value}\\ &TR=\text{total reserves}\\ &U=\text{units extracted in a given period}\\ \end{aligned}$​Cost of depletion=TRAPV​×Uwhere:APV=adjusted property valueTR=total reservesU=units extracted in 🐎a given period​

To calculate the adjustedꩲ value of the property, not🐷e that:

 $\begin{aligned} &APV = IC + DC - SV\\ &\textbf{where:}\\ &IC=\text{investment cost of a property or asset}\\ &DC=\text{development or exploration costs}\\ &SV=\text{salvage value}\\ \end{aligned}$​APV=IC+DC−SVwhere:IC=investment cost of a property or&nဣbsp;assetDC=development or exploration costsSV=salvage value​

What Does Cost Depletion Tell You?

Cost depletion is typically part of the "DD&A" (depletion, depreciation, and amortization) line of a natural resource company's 澳洲幸运5开奖号码历史查询:income statement. Depletion is similar to depreciation, which is used to allocate the cost of 澳洲幸运5开奖号码历史查询:tangible assets like factories and equipment over their useful lives. Depletion is used for natural resources, which can include minerals, ore, oil, gas, 🌄and timber. In particular, a company that extracts resources will use depletion to account for the use of these assets.

Example of How to Use Cost Depletion

The investment cost of a 澳洲幸运5开奖号码历史查询:natural resource asset is $2 billion and development costs during a period were $40 million. The 澳洲幸运5开奖号码历史查询:salvage value is $200 million. If the estimated number of resource units on this property is 600 million and the company extracts and se♏lls 10 million units, depletion expense under the cost depletion accounting method would be:

 $[\frac{(\$2 \text{billion} + \$40 \text{million} - \$200 \text{million})}{600 \text{million}}] \times 10 \text{million} = \$30.67 \text{million}$[600million($2billion+$40million−$200million)​]×10million=$30.67million

Companies engaged in mining or extracting identify their depletion expense methods and comment on period expenses in the 澳洲幸运5开奖号码历史查询:management discussion and analysis﷽ (MD&A) sections of𝕴 their quarterly and annual filings.

Pioneer Natural Resources Company states that it uses the cost depletion method and provided the following explanation for a 19% decrease in depletion expense for its fiscal year 2017: "The decrease is primarily due to (i) additions to proved reserves attributable to the Company's successful Spraberry/Wolfcamp horizontal drilling program and (ii) commodity price increases and cost reduction initiatives, both of which had the effect of adding proved reserves by lengthening the economic lives of the Company's producing wells."

The Difference Beꦯtween Cost Depletion and Percentage Depletion

The other method of depletion is 澳洲幸运5开奖号码历史查询:percentage depletion, which is calculated by multiplying the gross income received in the tax year from extracting a resource by an IRS-determined percentage established f♔or each resource. For example, if the percentage were 22%, depletion expense would🐬 be gross income times 22%. However, in some cases, cost depletion must be used over percentage depletion, such as the case with standing timber.

Limitations of Using Cost Depletion

Depletion can only be used for natural resources, while depreciation is allowed for all tangible assets. Unlike depreciation, coꦐst deple♕tion is based on usage and must be calculated every period.

For related information, read about how to account for depletion and other 澳洲幸运5开奖号码历史查询:non-cash charges.