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Units of Production Depreciation Method
Depreciation refers to the decrease in the assets value because of the effect of time, wear and tear, obsolescence because of advancements in technology, etc. Depreciation also comprises amortization. The Units of Production Depreciation Method, also known as the Units of Output Method, plays an important role to determine the charges on the assets depreciation.
Units of Production Depreciation Formula
The method to charge depreciation on the assets depends on the number of units that are produced throughout the year. The criteria to provide depreciation is the total estimated cost of the production. This is applied when the total equivalent units of production are equal to the value of the asset. Hence, during the years when there is a higher usage of the asset, the depreciation amount is high. Plants and machinery are some of the common assets on which this method is implemented.
Consider, for example, that a given machine has a total capacity for producing 10,00,000 meters cloth during its lifetime. Then in this case it is essential to follow the units of production depreciation method.
The total depreciation amount for a year is determined when the total depreciable amount of the asset is divided by the estimated total production multiplied by the units. This figure is then multiplied by the total number of units that have been produced in the year.
The Units of Production Method Formula is given by
Annual Depreciation = Depreciable Value x [frac{text{Units produced during the year}}{text{Estimated total production}}]
The Depreciable value = Original cost – Scrap value
Solved Example to Calculate Units Of Production Depreciation
Example:
A textile company bought machinery for ₹2,00,000 on the 1st of January that has an approximate 10 years of useful life and about ₹20,000 estimated residential value. The asset is sold by the firm at its residential value during the end of 10th year. The expected production units of the machinery is 15,000 during the course of its useful life. The current production pattern of the machinery is:
|
Year |
Production |
|
1-3 |
2,000 units per year |
|
4-7 |
1,500 units per year |
|
8-10 |
1,000 units per year |
Determine the Total Amount of Depreciation with the Help of the Units of Production Method. Pass the Required Entries of the Journal and Prepare the Machinery A/c.
Solution:
Calculation of Depreciation With the Help of the Units of Production Method:
Depreciable Value = Original cost – Scrap value
= 2,00,000 – 20,000
= 1,80,000
The Units of Production Method Formula is given by
Annual Depreciation= Depreciable Value х (Units produced During the Year)/(Estimated Total Production)
|
Year |
Annual Depreciation |
|
1-3 |
1,80,000 x 2,000/15,000 = 24,000 |
|
4-7 |
1,80,000 x 1,500/15,000 = 18,000 |
|
8-10 |
1,80,000 x 1,500/ 15,000 = 12,000 |
Journal Entry in the Books of the Textiles Industry is as Follows:
|
Date |
Particulars |
Amount (Dr.) |
Amount (Cr.) |
|
|
1st year |
||||
|
1-1 |
Machinery A/c |
Dr. |
2,00,000 |
|
|
To Cash A/c |
2,00,000 |
|||
|
(Being machinery purchased) |
||||
|
1st – 3rd year |
||||
|
31 Dec |
Depreciation on Machinery A/c |
Dr. |
72,000 |
|
|
(24,000 x 3) |
||||
|
To Machinery A/c |
72,000 |
|||
|
31 Dec |
Profit & Loss A/c |
Dr. |
72,000 |
|
|
To Depreciation on Machinery A/c |
72,000 |
|||
|
4th – 7th year |
||||
|
31 Dec |
Depreciation on Machinery A/c |
Dr. |
72,000 |
|
|
(18,000 x 4) |
||||
|
To Machinery A/c |
72,000 |
|||
|
(Being depreciation charged on machinery) |
||||
|
31 Dec |
Profit & Loss A/c |
Dr. |
72,000 |
|
|
To Depreciation on Machinery A/c |
72,000 |
|||
|
8th –10th year |
||||
|
31 Dec |
Depreciation on Machinery A/c |
Dr. |
48,000 |
|
|
(12,000 x 3) |
||||
|
To Machinery A/c |
48,000 |
|||
|
(Being depreciation charged on machinery) |
||||
|
31 Dec |
Profit & Loss A/c |
Dr. |
48,000 |
|
|
To Depreciation on Machinery A/c |
48,000 |
|||
|
10th year |
||||
|
31 Dec |
Cash A/c |
Dr. |
20,000 |
|
|
To Machinery A/c |
20,000 |
|||
|
(Being machinery sold) |
||||
|
31 Dec |
Machinery A/c |
Dr. |
12,000 |
|
|
To Profit & Loss A/c |
12,000 |