Units-of-production (output) method

The units-of-production depreciation method assigns an equal amount of depreciation to each unit of product manufactured or service rendered by an asset. Since this method of depreciation is based on physical output, firms apply it in situations where usage rather than obsolescence leads to the demise of the asset. Under this method, you would compute the depreciation charge per unit of output. Then, multiply this figure by the number of units of goods or services produced during the accounting period to find the period’s depreciation expense.

The units of production method requires a two-step process:

• Step 1: Calculate Depreciation per Unit:
  • [latex]\text{Depreciation per unit}=\dfrac{\left(\text{Cost}-\text{Salvage}\right)}{\text{expected number of units over lifetime}}[/latex]

• Step 2: Calculate Depreciation Expense:
  • [latex]\text{Depreciation Expense}=\text{Number of units produced this period}\times\text{Depreciation per unit}[/latex]

Here is a video example:

You can view the transcript for “Units of Production Depreciation” here (opens in new window).

Next, we’ll learn how to journalize adjusting entries to record depreciation.