Units of Production Depreciation
Units of production depreciation allows for (typically) machinery assets to be depreciated based on their actual production. The useful life of the asset is defined by the number of units it is expected to produce and depreciation for the asset ends once the scrap value is reached (this could be any time frame).
The calculation is done as follows:
Suppose an asset has a cost of $100,000, a scrap value of $20,000 and an expected production of 8000 units. We then get the cost per unit of production using the formula Cost of Asset – Scrap Value/Estimated Production which in our example would be $100,000 – $20,000/8000 = $10 per unit.
Depreciation is then taken based on the actual number of units produced. In our example once 8000 units are produced the asset has been fully depreciated, whether those 8000 units take 2 years or 8 years to produce.