## Depreciation (unit of production method)

Depreciation (unit of production method) =

(Cost of asset - Residual value)

Estimated total units expected

x Actual units produced

### CALCULATION:

Divide the cost of the asset―less its residual aka salvage value―by the total units you expect the asset to produce over its useful life. Then, multiply this rate by the actual units produced during the year.

### INTERPRETATION:

used when the asset's value is related to the number of units it produced instead of the number of years it was useful often used for businesses that use machinery or equipment to make a product.

### EXAMPLE:

M&M purchased an machine for \$10,000 , the residual value is \$1000 and machine is expected to be useful for 150,000 units. In year 1 M&M machine produced 18000 units and 13000 units in year 2 (see chart for consecutive years).

Description of asset: Labeling Machine

Year (start): 20XX

Residual value (salvage value): \$1,000

Useful Units (estimated total units expected): 150,000
Depreciation per unit: \$0.06

Depreciable Cost: \$9,000

### SEE: Depreciation Schedule - Unit of Production Method

Depreciable Cost = cost of asset – residual value
Depreciable Cost = \$10,000 - \$1,000 = \$9,000

Depreciation per Unit = Depreciable cost / Useful units
Depreciation per Unit = \$9,000 / 150,000 = \$0.06

Depreciation Expense = Depreciation per Unit x Number of Units Produced
Depreciation Expense = \$0.06 x 18,000 units = \$1,080

Accumulated Depreciation = Depreciation Expense + Accumulated Depreciation
Accumulated Depreciation (year 2) = \$1,080 + \$780 = \$1,860

Closing Book Value = Opening Book Value – Depreciation Expense
Closing Book Value = \$10,000 - \$1,080 = \$8,920

Operating Income :