units of production method depreciation

Units of production method (Production run method)

Definition of units of production method or Production run method

The production run method is also known as units of production method or units of output method. Under this method, the depreciation rate is estimated based on the total estimated output. Then, annual depreciation is calculated to multiply the depreciation rate by units of production in a particular year.

This method is basically used to calculate the depreciation of vehicles according to their covered distances.

Under this method, the depreciation rate calculated as follows:

Depreciation rate = Original cost – Salvage value / Total estimated output units

A Truck was purchased on July 1, 2015, for Rs. 10,00,000. The estimated scrap value is Rs. 100,000 and total estimated life is 90,000 kilometer (KM). In 2015, the truck covered 5,000 km of distance. In 2016, 15,000 km, and in 2017 it covers 20,000 km.

For example:

Required: Calculate the depreciation rate and annual depreciation for each year under units of production method and also prepare depreciation schedule.

Solution:

Here,

Original cost = Rs. 10,00,000

Scrap value = Rs. 1,00,000

Estimated life of the Truck = 90,000 KM

We have,

Depreciation rate = Original cost – Salvage value / Estimated life = Rs, 10,00,000 – 1,00,000 / 90,000 KM = Rs. 10 KM

Hence, required depreciation rate = Rs. 10 per kilomerter

Now,

Depreciation schedule

Under units of production method

YearUnits of
production in KM
Annual
depreciation
Accumulated
depreciation
Ending
value
July 1. 2015
Dec 31, 2015
Dec 31, 2016
Dec 31, 2017

5000 * 10/2
15,000 * 10
20,000 * 10

Rs. 25,000
Rs. 1,50,000
Rs. 2,00,000

Rs. 25,000
Rs. 1,75,000
Rs. 3,75,000
Rs. 10,00,000
Rs. 9,75,000
Rs. 8,25,000
Rs. 6,25,000

See, also related articles

Reducing balance method or Declining balance method of depreciation

Straight line depreciation or Original cost method of depreciation

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