Units of Production Depreciation
The units of production method of depreciation calculate depreciation by using the concept that the depreciation expense of fixed asset is directly proportional to the usage of the asset. This means that the depreciation expense will be more if the usage of the asset is more and depreciation expense will decrease if the usage of asset is decreased. This is one of the most accurate methods of calculating depreciation as it closely calculates all the wear and tear associated with the assets. However to accurately implement this method it is required to follow or track the usage of asset so that the depreciation can be calculated on the biases of the usage of the asset. In order to calculate depreciation on the biases of unit of production method you can follow the given steps
- Calculate the number of hours usage of the asset and conduct an estimation of the number of units produced in the entire useful life of the asset
- First of all the depreciation cost on the biases of per hour is calculated. In order to calculate depreciation cost on the biases of per hour the salvage value of the asset is subtracted from the cost of the asset that is capitalized prior to the calculation.
- Now the depreciation cost of per hour of the asset is multiplied with the number of hours of usage of the asset or the number of units of products produced by the asset. This will give us the unit of production depreciation cost of the asset.
If the number of hours of usage of the asset change the cost of units of production of depreciation also changes.
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