Units Of Production Depreciation Method Explanation And Examples

He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

The expense recognition principle that requires that the cost of the asset be allocated over the asset’s useful life is the process of depreciation. For example, if we buy a delivery truck to use for the next five years, we would allocate the cost and record depreciation expense across the entire five-year period. The calculation of the depreciation expense for a period is not based on anticipated changes in the fair market value of the asset; instead, the depreciation is based on the allocation of the cost of owning the asset over the period of its useful life. If during the first accounting period the equipment produced 13,500 units, then the calculation of the depreciation expense for the accounting period is as follows.

How is the Unit of Production Method of Depreciation Used?

Used only when calculating depreciation for equipment or machinery, units of production depreciation looks at the number of units produced or hours in operation in order to calculate depreciation totals. If units of input (e.g., operating hours, materials, or labor-hours) are more descriptive than cost incurred or benefit obtained (or if they are easier to measure than units of production), the firm can use them to determine the depreciation expense. In Step 1, we determined the units of production rate for your WidgetMaker 3000 was $0.10/Widget. To arrive at the depreciation expense, we will multiply the number of Widgets produced each month by $0.10 to arrive at the depreciation expense for the month. For example, a machine may be depreciated on the basis of output produced during a period in proportion to its total expected production capacity. Therefore, useful life of an asset under Units of Production Method is stated in terms of production output or usage rather than years of service.

• For the remaining years, the double-declining percentage is multiplied by the remaining book value of the asset.
• The units of production depreciation method calculates the annual depreciation expense of property, plant and equipment based on its usage.
• Instead, the depreciation calculation is made and entries are recorded into your bookkeeping software on a recurring basis.
• The equivalent production for each department is determined, which is later used to calculate the cost per unit of each job order by apportioning their total costs on basis of equivalent units.
• “It’s become almost a fait accompli, that you can’t do certain things, even though there’s no home rule statute in our books.
• As described previously, process costing can have more than one work in process account.

For example, during the month of July, Rock City Percussion purchased raw material inventory of $25,000 for the shaping department. Although each department tracks the direct material it uses in its units of production own department, all material is held in the material storeroom. Unit of production amortization rates should be revised at least once a year, or whenever the need for a revision is indicated.

Trial Balance

The units of production depreciation method is more cumbersome to calculate than most of the other depreciation methods. You have to adjust the calculation from one period to the next based on the asset’s usage, meaning you can’t set up an automatically posting depreciation entry in your accounting software. The units-of-production depreciation method assigns an equal amount of depreciation to each unit of product manufactured or service rendered by an asset.

Units of Production Method may be appropriate where there is a high correlation between activity of an asset and its physical wear and tear. As no depreciation under this method is charged when an asset remains idle, it is not appropriate for depreciating assets that suffer a significant decrease in their earning potential with the passage of time for reasons such as technological obsolescence. Oil PLC installs a crude oil processing plant costing $12 million with an estimated capacity to process 50 million barrels of crude oil during its entire life. The units of depreciation method is also known as the units of activity method.