Final answer:
The statement is true; depreciation expense allocates the cost of an asset over its useful life, not based on the actual economic value used each period.
Step-by-step explanation:
The statement "Depreciation Expense reflects an allocation of an asset's original cost rather than an allocation based on the economic value that is being consumed" is true.
Depreciation expense is a way businesses allocate the cost of a tangible asset over its useful life rather than matching the expense to the actual economic value consumed during a period.
Typically, the original cost of the asset is spread out over the estimated useful life through various methods, such as straight-line, declining balance, or units-of-production depreciation.
However, the economic value or the market value of the asset is not considered in these calculations.
When we look at costs, we can break them down into fixed costs and variable costs.
Fixed costs, like the rent on a factory, remain constant regardless of the level of production.
These represent the costs required to maintain the capital (e.g., machinery, equipment) necessary for production.
Similarly, an asset's depreciation is often viewed as a fixed cost, as it doesn't fluctuate with production levels but is recognized consistently over time as an allocation of the asset's original purchase price.