Calculate units of production depreciation

Overview

Units of production depreciation is a type of depreciation method of the fixed asset that the depreciation expense is solely based on the result of the use of the fixed asset rather than the passage of time like other depreciation methods. Likewise, the company can calculate units of production depreciation after it has appropriately measured the output as a result of the fixed asset usage during the period.

Of course, in order to properly calculate the units of production depreciation for a specific fixed asset, the company also needs to have the ability to reasonably estimate the total output that the fixed asset can produce over its whole useful life. Additionally, the salvage value also needs to be reasonably accurate in estimation if there is any.

The units of production depreciation is suitable for the type of fixed asset that produces the output of usage or production differently from one period to another. This is because the process of allocating the cost of the fixed asset under the units of production depreciation should result in the fluctuation of depreciation expense from one period to another. This is so that the company can comply with the matching principle of accounting when charging the depreciation expense into the income statement.

Calculate units of production depreciation

The company can calculate units of production depreciation by firstly determining the depreciable cost per unit with the formula of cost minus the salvage value and then divide the result with the estimated units that the fixed asset is expected to produce for its whole useful life. Then use the depreciable cost per unit to multiply with the units produced by the fixed asset during the period.

Units of production depreciation formula:

Depreciable cost can be determined by using the cost of the fixed asset deducting its estimated salvage value.

Estimated units of useful life are the estimated total production units that the fixed asset can produce during its useful life. There may be a variety of measurement units for this figure, such as hour, mile or unit, etc. based on the type of fixed asset the company owns.

Units of production during the period is an actual figure of production that the company receives from the usage of the fixed asset during the period. Likewise, it is important for the company to properly measure the productivity that the fixed asset produces during each period of accounting.

Units of production depreciation example

For example, company ABC that is a manufacturing company bought a machine that costs $42,000 for day-to-day operation. The company estimated that the machine would be able to produce 100,000 units of the total production during its useful life. And it was expected to have $2,000 salvage value at the end of its useful life.

During the first 3 years, the machine produced 9,000 units in the first year, 13,000 units in the second year and 11,000 in the third year.

Calculate the units of production depreciation in year 1, year 2, and year 3.

Solution:

With the information in the example, we can calculate the units of production depreciation with the formula below:

Depreciation expense = depreciable cost per unit x units of production during the period

Depreciable cost per unit = depreciable cost / estimated units of useful life

Depreciable cost per unit = ($42,000 – $2,000) / 100,000 units = $0.4 per unit

In this case, we can calculate the units of production depreciation each year for the first 3 years as below:

Year 1:

Depreciation expense in year 1 = 0.4 x 9,000 = $3,600

Year 2:

Depreciation expense in year 2 = 0.4 x 13,000 = $5,200

Year 3:

Depreciation expense in year 3 = 0.4 x 11,000 = $4,400