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Units-of-production method

The useful life of some assets is determined by their usage. For example, a machine may be expected to produce 50,000 widgets or to operate for 20,000 hours in its estimated useful life, and a transport vehicle may be expected to run for 100,000 miles. The depreciable cost uses the following as the basis for the calculation of depreciation for each period:

  1. Number of units produced
  2. Number of hours used.
  3. Number of miles travelled

The per-unit cost of usage is calculated by dividing an asset’s depreciable cost by the number of units, hours or miles that the asset is expected to produce, use or travel. The per-unit cost times the actual number of units, hours or miles in a year gives the depreciation expense for the asset for that year expressed as follow:


1. Number of units produced

Depreciable cost* / Total expected production = per unit depreciation expense

Number of units produced per accounting period x per unit depreciation expense = depreciation expense for the asset for the accounting period

* Cost less salvage value


For example, if the cost of an asset is $34,000, its salvage value is $4,000 and its total estimated production is 500,000 units. Its depreciation expense for the first three years is as folow:

First year production: 50,000 units
Second year production: 60,000 units
Third year production: 75,000 units

Depreciation expense per unit = $34,000 – $4,000 / 500,000 = $0.06

First year: 50,000 units @ $0.06 = $3,000
Second year: 60,000 units @ $0.06 = $3,600
Third year: 75,000 units @ $0.06 = $4,500


Another example, the cost of a machine is $65,000, its salvage value is $5,000 and is expected to produce 30,000 units for a period of five years.

Its depreciable cost is $65,000 – $5,000 = $60,000.
Depreciation expense per unit = $60,000 / 30,000 = $2.

Year
Units produced Depreciation cost per unit Depreciation expense Accumulated Depreciation Net book value
$ $ $ $
1 3,000 2 6,000 6,000 59,000
2 4,500 2 9,000 15,000 50,000
3 6,000 2 12,000 27,000 38,000
4 7,500 2 15,000 42,000 23,000
5 9,000 2 18,000 60,000 5,000*

* Salvage value which is equal to the book value at the end of the fifth year.


2. Number of hours used

The calculation of depreciation provision for a period is based on the number of hours that the machine is operated during the period compared with the number of hours expected from the machine during its useful life. This depreciation rate is then used to multiply the depreciable cost of the asset.

For example:
Cost of machine: $80,000
Salvage value: Nil
Expected productive life: 20,000 hours
Depreciation rate: $4 per hour ($80,000 / 20,000 hrs.)

Year
Hours operated Depreciation cost per hour Depreciation expense Accumulated Depreciation Net book value
$ $ $ $
1 2,000 4 8,000 8,000 72,000
2 3,500 4 14,000 22,000 58,000
3 4,000 4 16,000 38,000 42,000
4 5,000 4 20,000 58,000 22,000
5 5,500 4 22,000 80,000 Nil*

* The machine is fully depreciated at the end of the fifth year and has zero book value. It may still be operating and no further depreciation will be charged.


 

Last Updated (Friday, 03 September 2010 18:52)