Unit of Production
Candlefocus EditorThe unit of production method is a useful way of calculating depreciation expenses for assets that experience a high degree of wear and tear due to their use in the production process. This method of depreciation considers the asset’s practical usage in the production process instead of its time in use, thus providing a more accurate reflection of depreciation expenses.
For certain types of assets such as machinery and production equipment, showing a higher depreciation expense in more productive years can help offset increased production costs. This method is especially useful for companies whose assets have a specific limit of usage before they become obsolete, such as vehicles and airplanes. By utilizing the unit of production method of depreciation, companies can better calculate depreciation expenses to obtain a more accurate financial report.
The unit of production method is determined by estimating the total useful life of an asset based on the number of units the asset is able to produce. This estimation is determined by taking the asset’s total cost and dividing it by the total number of units the asset is expected to produce. This figure is then multiplied by the actual number of units the asset produces in a certain period. By using this calculation, companies are better able to calculate depreciation expenses that are specific to the asset’s usage.
An example of the unit of production method of calculation would be a vehicle that costs $15,000 and is expected to be used for 200,000 miles before it becomes obsolete. To calculate the depreciation using the unit of production method, the company would divide the cost of the vehicle ($15,000) by the estimated usage (200,000 miles). This would result in a cost of $0.075 per mile. If the vehicle was driven 10,000 miles in a year, the vehicle’s depreciation would be $0.075 x 10,000 miles, which would be $750 for that year.
The unit of production method is a useful way of calculating depreciation expenses for assets that experience a high degree of wear and tear due to their use in the production process. By utilizing this method, companies can more accurately calculate depreciation expenses and obtain a more accurate financial report. Additionally, this method can allow companies to show higher depreciation expenses in more productive years, which can help to offset other increased production costs. As such, the unit of production method of depreciation can be a wise choice for calculating depreciation expenses for certain types of assets.