How do I compute the units of production method of depreciation? Example?

Expert Solution

Follow these steps to calculate depreciation under the units of production method:

Estimate the total number of hours of usage of the asset, or the total number of units to be produced by it over its useful life.
Subtract any estimated salvage value from the capitalized cost of the asset, and divide the total estimated usage or production from this net depreciable cost. This yields the depreciation cost per hour of usage or unit of production.
Multiply the number of hours of usage or units of actual production by the depreciation cost per hour or unit, which results in the total depreciation expense for the accounting period.

depreciation=		number of unit produced/ Life in number of units × (Cost − Salvage Value)

Example : A plant costing $110 million was purchased on April 1, 2010. The salvage value was estimated to be $10 million. The expected production was 150 million units. The plant was used to produce 15 million units till the year ended December 31, 2010. Calculate the depreciation on the plant for the year ended December 31, 2011.

Depreciation = (15/150) × ($110 million - $10 million) = $10 million

ekkarill92 answered 1 year ago

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