Month End Glossary

Unit of Production Depreciation

Unit of production depreciation is a method of calculating depreciation based on the asset's usage, such as mileage or production hours, rather than time.

Unit of production depreciation is a method of calculating the depreciation expense for an asset based on its actual usage instead of the passage of time. This approach is particularly suitable for assets whose usage varies significantly over periods, such as machinery, vehicles, or equipment. In this method, the total production capacity or expected usable life in terms of output is estimated at the beginning. The depreciation cost per unit is derived by dividing the asset's depreciable base (cost minus salvage value) by its estimated total production. Then, for each accounting period, the depreciation expense is calculated based on the actual units produced or used during that period. For example, if a machine costing $50,000 with a salvage value of $5,000 and an estimated output of 90,000 units produces 30,000 units in a year, the depreciation expense for that year would be $15,000.

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