# Units of Production Depreciation Method

The units of production depreciation method is used to calculate the annual depreciation expense of property, plant and equipment based on its usage. For this reason the production depreciation method is sometimes referred to as the units of activity depreciation method or the usage method of depreciation.

Usage can be defined as any unit measure such as the number of units produced, number of hours used, or number of miles driven, and the depreciation expense for a particular accounting period will depend on the quantity of that unit measure consumed during the period.

## Units of Production Depreciation Method Formula

Using the production method, the depreciation rate is given by the units of production depreciation formula as follows:

Units of production rate = (Cost – Salvage Value) / Lifetime in units

The depreciation expense fro the period is then based on the depreciation rate and the number of units produced during the period.

Depreciation expense = Rate per unit x Number of units

The method is in fact very similar in calculation to the straight line method of depreciation, except that the estimated useful life is defined in terms of the total expected usage instead of a time period in years.

## Units of Production Depreciation Example

Suppose, for example, a business has purchased production equipment costing 20,000 and expects it to have a useful life 50,000 units of production and an estimated salvage value of 4,000, then the units of production depreciation calculation using the formula above would be as follows:

```Units of production depreciation = (Cost - Salvage Value) / Lifetime in units
Units of production depreciation = (20,000 - 4,000) / 50,000
Units of production depreciation = 0.32 per unit of production output
```

If during the first accounting period the equipment produced 13,500 units, then the depreciation expense for the accounting period would be calculated as follows:

```Units of production depreciation = 0.32 x Production units for the period
Units of production depreciation = 0.32 x 13,500
Units of production depreciation = 4,320
```

Using the units of production depreciation method, the depreciation expense will be different each year depending on the level of usage of the equipment. Suppose in the above example the production output in year 2 was 25,000 units and in year 3, 11,500 units, then the depreciation expense each year would be as follows:

Units of Production Depreciation Method
Year Units Rate Depreciation NBV
0 20,000
1 13,500 0.32 4,320 15,680
2 25,000 0.32 8,000 7,680
3 11,500 0.32 3,680 4,000
Total 50,000 0.32 16,000 4,000

After the equipment has produced 50,000 units the total accumulated depreciation would be 16,000 (0.32 x 50,000), and the equipment’s net book value would be the salvage value of 4,000.

The analysis of the units of production depreciation method is shown below:

 Cost 20,000 4,320 8,000 3,680 4,000 Depreciation Salvage

## Units of Activity Depreciation Example

Instead of units of production output, the equipment might be depreciated using an alternative unit such as miles driven. Although the type of units change, the method of calculation remains the same. As an example, suppose equipment costing 30,000 with a salvage value of 5,000 has an expected useful lifetime of 40,000 miles, then the units of activity depreciation calculation using the formula above would be as follows:

```Units of activity depreciation = (Cost - Salvage Value) / Lifetime in units
Units of activity depreciation = (30,000 - 5,000) / 40,000
Units of activity depreciation = 0.625 per mile driven
```

If during the accounting period the equipment was driven for 18,000 miles, then the depreciation expense for the accounting period would be calculated as follows:

```Units of activity depreciation = 0.625 x Miles driven in the period
Units of activity depreciation = 0.625 x 18,000
Units of activity depreciation = 11,250
```
Units of Production Depreciation Method June 14th, 2017

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