Wang Dongjing Column: From The Depreciation Of Fixed Assets To Discuss The Space For Enterprises To Reduce Costs

Dong Jing Wang

Under the impact of the new crown pneumonia epidemic, China's first quarter economic downward pressure has increased significantly. In order to support enterprises' resumption and resumption of production, the central government recently stressed the need to implement tax reduction and tax reduction policies as soon as possible. Reducing taxes and lowering costs is a way to reduce costs for enterprises. But I think it is not enough to lower the cost by relying on the government to reduce taxes and reduce fees. My purpose is to discuss with readers the question of whether depreciation of fixed assets can not be included in cost.

To tell you the truth, I have been thinking about this question for many years, and have discussed with the friends of the enterprise many times, but I have been hesitant to write articles in consideration of the difficulties in operation. Weighing these days, I still feel that I should write. Fortunately, economists only make suggestions, and the last is the government.

In daily life, the fixed cost, the variable cost, the total cost, the average cost and so on are all financial costs, while the cost in economics refers to the opportunity cost, that is, the highest cost of giving up other choices as a choice. The difference lies in the fact that the former refers to the cost of value and the latter emphasizes the cost from the perspective of choice. This is to say that an investment (value cost) has a choice, and economics regards it as cost; if there is no choice, it is not cost.

The current practice is that depreciation is a cost allocation. The question is whether depreciation of fixed assets is cost at all? In my opinion, when making investment budget, fixed assets investment is cost, while depreciation of fixed assets is not cost. Investment in fixed assets is a cost. The reason is that when deciding whether to purchase fixed assets, enterprises have choices, and the choice is of course cost. Why can we say that depreciation is not a cost? Because once the fixed assets are purchased, enterprises will no longer have a choice and no choice. Depreciation can not be regarded as a cost.

Why can depreciation be regarded as cost? It may be easier for us to interpret the "sunk cost" in economics. The so-called sunk cost refers to the investment that has already happened and can not be recovered. In reality, examples of this area are everywhere. Someone spent four years in college and spent 100 thousand yuan on tuition, and no matter what he learned from school, and whether he could get his diploma in the end, he would not give him the tuition fee. The 100 thousand yuan is the investment he can not recover and his sunk cost.

To sum up, sunk cost has two characteristics: first, historical investment; and second, investment that cannot be reclaimed. Based on these two points, economics thinks that sunk cost is not the real cost. Stiglitz, an American economist, has made such an explanation. He said, if you spend 7 dollars to buy movie tickets, and you don't know if the movie is worth the money, then you see half of the film is bad, then you want to leave? Stiglitz suggested that you should leave. Because that 7 dollar has sunk, if you do not leave, you will lose more time.

Having understood the sunk cost, we will analyze the fixed assets investment again. For enterprises, investment in fixed assets is no longer a historical investment. If a company fails to liquidate an auction, its fixed assets will not be realized. Even if it can not be liquidated, it can not be fully recovered. In this way, the investment in fixed assets has been unable to recover. It is obviously sunk cost. And the sunk cost of economic theory is not a cost. Since it is not a cost, depreciation of fixed assets should not be cost, right?

About two years ago, a private entrepreneur from the South visited me and told me that his company had been losing money for two consecutive years. The market price of products dropped, and the salaries of executives and employees decreased, but the investment in fixed assets was too large and the depreciation cost was too high to drop. I asked if the depreciation does not enter the cost, can the enterprise profit? He said he could make profits. So I told him that depreciation is not a good idea.

The enterprise is representative. If depreciation does not enter the cost, most of these enterprises can turn around a profit. Take an example: a company produces printers, assuming that the market price of printers is 2000 yuan, while the variable cost of producing a printer is 1800 yuan, and the depreciation cost of fixed assets is 250 yuan. If the cost of depreciation is calculated, the unit cost of printers is 2050 yuan. In this way, every company sells a printer and loses 50 yuan. But if depreciation does not cost, each printer can make a profit of 200 yuan.

Yes, if depreciation does not cost in advance, it will leave room for enterprises to reduce costs. However, readers may ask questions: first, will such processing affect the renewal of fixed assets on schedule? Two, we should pay more income tax after the cost reduction. Can enterprises accept it?

I am not worried about the first problem. If depreciation is not included in the cost, corporate profits will increase, and enterprises will be able to update fixed assets as well as profits. In fact, depreciation is just killing the goose that lays the golden eggs. If the enterprise fails to turn a profit, it will be useless even if the depreciation is prepaid.

The second question is really a problem. I hesitated before to write this article. That's why. Yes, if the sales revenue is certain, the cost and profit will change. If depreciation does not go into costs, profits will increase. If the government does not lower the income tax rate, enterprises will have to pay more taxes. Entrepreneurs are not stupid. How can they accept my suggestions?

Now it seems that the key to the problem is whether the government can lower the income tax rate. It has been said that lowering the tax rate will be a bit troublesome, but it depends on the government's consideration: depreciation cost, profit reduction and government revenue reduction. If the enterprise loses money, the government will not receive tax. If depreciation is not included in the cost, business profits will increase and the tax rate will be lowered appropriately, government revenue will also increase. As for how much the tax rate is down, the tax department can calculate, and I will not say much.