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
| Year | Units 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 |