There are different factors that determine the amount of depreciation to be provided on a fixed asset. They are as follows:
(i) Original cost of the asset :
(a) It means the amount incurred in acquiring the asset. It includes all those expenses incurred on the asset till it is put into use.
(b) Purchase price of the asset, freight, loading charges, unloading charges, erection cost, setting up cost and expenses of trial run are part of the original cost.
(ii) Estimated useful life of the asset:
(a) The time period for which an asset can be used in the enterprise is known as estimated useful life of an asset.
(b) In the case of leased assets, the period of lease is taken as its useful life. In the case of intellectual properties like patents and copyrights, their legal life is taken as their estimated useful life.
(iii) Scrap value of an asset:
(a) The amount which is expected to be realised at the end of the estimated useful life life of an asset is known as scrap value of the asset.
(b) In determining the scrap value, costs to be incurred for removal and sale of the asset should be deducted from the estimated gross realisable value.
(iv) Other factors:
Besides above mentioned factors, estimated running hours, production capacity, and other factors also determine the amount of depreciation.

Machine hour rate Method:
(i) Under this method, depreciation per machine hour is calculated.
(ii) The cost of the machinery after deducting, the residual value, if any, is divided by the estimated working hours of the machine to find the depreciation per hour.
(iii)The actual depreciation for any given period depends upon the working hours during that year.
The following formula is used to determine the rate of depreciation:
Rate of Depreciation per Machine Hour = \(\frac { Original\quad cost-Estimated\quad Scrap\quad value }{ Life\quad of\quad the\quad asset\quad in\quad hours } \)

(i) Under this method, the amount of annual depreciation is calculated by comparing the value of the assets at the end of the year and their value at the beginning of the year.
(ii) The value of the asset at the end of the year is determined with the consultation of relevant experts.
(iii) The excess of opening value over the closing value of the asset is the amount of depreciation for that year.
(iv) This method is used for live stock, loose tools, etc.

(i) Under this method, an insurance policy is taken for an amount equal to the cost of replacement of the asset.
(ii) The amount of depreciation is paid by way of in surance premium every year to the insurance company.
(iii) On maturity of the policy, the policy amount is received from the insurance company and it is used for the purchase of new asset.