Wear and tear refer to the gradual loss of function or efficiency in equipment due to regular use. It is not the result of sudden incidents but occurs over time, as mechanical parts degrade due to friction, heat, or material fatigue.
From a legal standpoint, wear and tear plays a crucial role in contracts, especially in leases and service agreements. In these contexts, wear and tear is typically defined as the normal depreciation of assets and equipment that results from proper use. This becomes important in determining liabilities—what is considered acceptable aging versus what constitutes damage beyond normal use.
Wear and tear is a natural part of normal use, while damage results from negligence, misuse, or an unexpected event. This distinction between the two is important to understand, especially when it comes to legal disputes. In manufacturing environments, wear and tear might appear as minor signs of continued use, such as rust on a machine, while damage would be more evident through broken parts due to mishandling or missing maintenance. Below is a table to highlight some different examples of wear and tear versus damage:
Many factors can accelerate or decelerate the wear and tear of equipment, below are the main factors:
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Although wear and tear can't be entirely eliminated, it can be minimized and managed through routine and preventive maintenance. Here are some other approaches to prevent or limit wear and tear:
Depreciation accounting allows companies to quantify wear and tear over time. Two commonly used methods are the straight line method and the double declining balance method:
This method spreads the cost of the asset evenly over its remaining useful life. It assumes that wear and tear occur at a constant rate. This is used when as asset's decline in value is expected to be consistent year over year.
For example: A machine costs $50,000 with a salvage value of $5,000 and a useful life of 10 years would depreciate by $4,5000 annually.
Examples of machinery that use straight line depreciation include:
Basic manufacturing equipment: Machines like conveyors, forklifts, or simple lathes that have steady, long-term usage without significant spikes in wear early on.
HVAC systems: Heating, ventilation, and air conditioning systems used in buildings, which have a consistent lifespan.
Leasehold improvements: Enhancements made to rented industrial spaces, like lighting or electrical systems, which depreciate evenly over time.
Furniture and fixtures: Office or shared space furniture, shelves, and workstations that depreciate gradually and uniformly.
This method applies a higher depreciation rate in the early years of an asset's life, which reflects the reality that many assets lose more value in their first years of use. This approach is better for equipment that experiences heavy initial use or is likely to become obsolete quickly.
For example: The same $50,000 machine might depreciate faster under this method in the early years, better reflecting its wear and tear during the period of peak usage.
Examples of machinery that use double declining balance depreciation include:
High-tech equipment: Machines like CNC machines or advanced robotics that quickly lose value due to rapid technological advancements.
Heavy machinery: Construction equipment, such as bulldozers, cranes, excavators, that undergo significant heavy initial use.
Manufacturing equipment: Machines like injection molding or metal stamping equipment that experience heavy initial use.
Computers and IT equipment: Servers, networking hardware, or other IT infrastructure that becomes outdated quickly.
Regular maintenance mitigates wear and tear and maintenance strategies like predictive maintenance (PdM) and total productive maintenance (TPM) help monitor equipment health, anticipate failures, and schedule timely repairs or parts replacements. This not only prevents unexpected downtime but also reduces long-term costs associated with repairs and extends the lifespan of equipment.
Regular maintenance strategies to mitigate wear and tear however, each have their own pros and cons. Below is a table to help you compare maintenance strategies to manage wear and tear:
Among these strategies, predictive maintenance is the most effective for mitigating wear and tear as it allows for real-time tracking of equipment conditions, optimizing maintenance efforts. Preventive maintenance also provides good protection by keeping machines in top shape through scheduled check-ups. TPM ensures that minor issues are caught early, adding another layer of protection against wear and tear.
Although wear and tear are a constant reality in manufacturing, with proper understanding, preventive maintenance, and smart accounting methods, its impact can be minimized. Keeping equipment in optimal condition ensures that production processes remain smooth and cost effective.
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