﻿ Breakdown Method

# Breakdown Method

Using the breakdown method of estimating accrued depreciation:

 1 Each classification of depreciation is analyzed.
 2 The dollar amount or percentage amount of depreciation for each classification is estimated.
 3 The dollar amount for each classification is added to estimate the total depreciation.

Steps in Estimating Depreciation by the Breakdown Method

 1 Estimate the dollar amount of curable physical deterioration (deferred maintenance):
 A. Identify each item of curable physical deterioration.
 B. Estimate the cost to cure each item of curable physical deterioration.
 C. Add the total of all deferred maintenance.

 2 Estimate the dollar amount of incurable physical deterioration of short-lived components:
 A. Estimate the effective age of each component.
 B. Estimate the total physical life of each component.
 C. Calculate the percentage straight-line physical deterioration of each component by dividing the effective age by the physical life.
 D. Estimate the replacement cost new of each component.
 E. Estimate the dollar amount of depreciation of each component by multiplying the percentage depreciation by the replacement cost.
 F. Add the depreciation of each component to arrive at total incurable physical deterioration.

 3 Estimate the dollar amount of incurable physical deterioration of long-lived items:
 A. Estimate the replacement cost of the entire building.
 B. Subtract the estimated replacement cost new of components for which depreciation was calculated in 1 and 2 above.
 C. Estimate the effective age of the entire building.
 D. Estimate the economic life of the entire building.
 E. Calculate the percentage straight-line depreciation for the long-lived components.
 F. Calculate the depreciation for the long-lived components by multiplying the straight-line depreciation percentage by the long-lived component's cost new.

 4 Estimate total depreciation by adding the dollar amounts of the deferred maintenance, the incurable physical deterioration of short-lived components, and the incurable physical deterioration of long-lived components.