Units of Production Depreciation
This method of depreciation applies to the assets that are subject to heavy production activities. And in this method, the depreciation calculation or write-off of assets happens based on the quantum of production. In other words, this method is preferable where the life of the asset is mostly dependent upon its usage/production volume. The depreciation is more for the period in which the volume of production is high and vice versa. Units of production depreciation calculator are made to help users in the quick calculation of depreciation as per this method.
The company will produce more only when it expects the demand to be more. And this will mean that the total sales volume and thus the revenue for the period will be more. Hence, to match with the revenues, the depreciation should be more in the year in which sales are high. Thus, following this method, we will be able to match the depreciation in proportion to the production volume.
The Formula for calculating depreciation using the unit of production method is as follows:
Unit of Production Depreciation = Depreciable Value * Actual Number of Units Produced during the Year / Total Estimated Production over the life of the asset.
How to Calculate using Calculator?
The user has to provide the following data to the calculator:
Depreciable value means the value to be depreciated over the life of the asset. The value cannot be realized in cash after using the asset to its full capacity. The depreciable value is equal to the original cost of the asset less its scrap value.
Actual Number of Units Produced
This means the number of units manufactured by the company in the period for which the depreciation is being calculated.
Total Estimated Production
Provide the figure of a total number of units estimated to be produced from that asset over its total life.
Example of Units of Production Depreciation Calculator
Let us take an example to illustrate this in a better way. A company engaged in the manufacturing of plastic toys buys a machine for $500,000. The useful life of the machine is 7 years with a scrap value of $25,000. The maximum estimated capacity of the machine is to manufacture 40,000 units.
The company produced 9,000 units in the first year and then 7,500 for the next two years and 4,000 for the next years.
The depreciable value of the machine is $475,000 ($500,000 – $25,000). And, the depreciation on the basis of units of production is:
|1st Year||9,000||106,875||475,000*(9,000 / 40,000)|
|For next 2 years|
|7,500||89,062.5||475,000*(7,500 / 40,000)|
|For next 2 years|
|4,000||47,500||475,000*(4,000 / 40,000)|
In the above example, depreciation for the first year is $106,875. For the next two years, $89062.5 each. And $47,500 for the rest of 4 years. This method signifies that the more the usage of an asset more its depreciation will be. The company has manufactured the highest quantum in the first year; hence the depreciation is also maximum in that year. Also, the depreciation has decreased with the decrease in manufacturing volume over the following years.
This method is applicable to manufacturing concerns mostly, and not all types of businesses can use this. Also, even a manufacturing concern cannot use this method for all the assets. This method is not of much use in the real world as a product may have to go through different types of machines before it gets converted to finished goods. And all those assets’ useful life can not be decided precisely on the basis of production capacity. Timespan/ efflux of time also reduces the workable life of the asset.