5 Steps to Calculate Units of Production Depreciation

Units of ProductionEver wonder what you should do to figure out units of production depreciation? The fine folks at accounting.answers.com have offered up a straight forward 5 step process that illustrates and simplifies that process.

Units-of-production depreciation is based on the principle that the more you use the asset, the more depreciation you should record. Other techniques include straight-line, double-declining balance, and sum-of-years’ digits.

Step 1. Get the information you need.

To start, you’re going to need the following information:
(1) cost of the long-lived asset;
(2) the asset’s useful life as measured in units of production (for example, how many hours you expect a machine to run during its lifetime);
(3) the asset’s salvage value (expected value at the end of its useful life; also known as residual value);
(4) how many units of production the machine produced this year.

Step 2. Compute the depreciable base.

The depreciable base, the total depreciation to be recorded over the life of the asset, is equal to the cost of the asset less its salvage value. Depreciable base = Cost – Salvage value
Step 3. Calculate the depreciation rate.

To compute the depreciation rate, just divide the depreciable base (found in Step 2) by the number of useful life as measured in units of production.

Depreciation rate = Depreciable base / Useful life as measured in units of production

Step 4. Work out the depreciation expense.

To figure out the year’s depreciation, multiply the depreciation rate by the number of units produced.

Step 5. Record the journal entry.

Finally, record the adjusting journal entry for depreciation expense.

Read the full article here:

Or, you can read our earlier post on the same topic, that has a detailed example, Calculate Depreciation with Units of Production Method.

Questions? Comments? Let us know in the comments section below.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

Calculate Depreciation with Units of Production Method

The units of production method of calculating depreciation is based on actual usage as opposed to a specified period of years and/or months. Depreciation will be higher when the asset is in active production and lower during periods of inactivity. Here is the basic formula for a units of production calculation:

Units of Production

This method is typically limited to more expensive assets since it requires the recording of monthly asset usage and an estimate for total usage over the life of the asset. On the positive side, this method is a very accurate for charging depreciation since it is directly based on the wear and tear of the asset. Here is an example that illustrates a units of production calculation:

  • Assume a $2,000,000 asset
  • Lifetime production of 2,400,000
  • Monthly production of 12,000

In this example monthly depreciation would be $10,000 by using the formula:

  • (12,000 / 2,400,000) *   $2,000,000

The depreciation calculation will fluctuate as the monthly production changes over the life of the asset.  If there is any salvage value, then the cost should be reduced to accurately reflect the true value of the asset. There is also a variation of this calculation for mining operations that allows for the lifetime units to change based on the mine reserve.

Bassets eDepreciation includes an optional module to process units of production. This module enables the entry of lifetime production for each asset and the corresponding monthly production. The monthly production can be manually entered or imported from an Excel spreadsheet.

Questions or comments about this post? We invite you to respond in the space below.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.