Units of production method

Units-of-production method determines the useful life of an asset based on the units of production. Each period, the units of production determine the depreciation expense.

To illustrate this situation, assume that the computer use varies from one year to another. We will take hours of computer use as the basis for our computations of depreciation expense. During 20X7 the computer was in use for 8,000 hours, in 20X8 – for 12,000 hours, in 20X9 – for 4,000 hours, and in 20X0 – for 16,000 hours (totaling 40,000 hours). The first step in determining depreciation expense under the units-of-production method is to calculate the cost per unit of production (usage, in our example). This cost can be calculated by dividing the total depreciable cost (historical cost – salvage value) by the number of hours the computer is expected to be in use over its useful life. The cost per hour is $0.5 ($20,000 / 40,000 hours). Then the depreciation expense for every year is determined by multiplying the cost per hour by the number of hours the computer was in use. The table below shows the computation results:

Illustration : Schedule of units-of-production depreciation for Mr. Serfy’s computer

Year

Cost Per
Hour

x

Hours Computer
in Use

=

Depreciation
Expense

20X7

0.5

x

8,000

=

$4,000

20X8

0.5

x

12,000

=

$6,000

20X9

0.5

x

4,000

=

$2,000

20X0

0.5

x

16,000

=

$8,000

40,000

$20,000

Let us assume that the revenues during the four accounting periods were as follows: for 20X7 – $8,000, for 20X8 – $10,000, for 20X9 – $6,000, and for 20X0 – $12,000. Look at the financial statements under the units-of-production depreciation method presented below:

Illustration 8-12: Financial statements under the units-of-production depreciation method

Financial Statements under Units-of-production Depreciation Method

Income Statement
 

20X7

20X8

20X9

20X0

Revenue

$8,000

$10,000

$6,000

$12,000

Depreciation Expense

(4,000)

(6,000)

(2,000)

(8,000)

Operating Income

$4,000

$4,000

$4,000

$4,000

Gain

0

0

0

1,000

Net Income

$4,000

$4,000

$4,000

$5,000

Balance Sheet
Assets

     Cash

$10,000

$20,000

$26,000

$42,000

     Computer

$23,000

$23,000

$23,000

0

     Accumulated Depreciation

(4,000)

(10,000)

(12,000)

0

Total Assets

$29,000

$33,000

$37,000

$42,000

Equity

    Contributed Capital

$25,000

$25,000

$25,000

$25,000

    Retained Earnings

4,000

8,000

12,000

17,000

Total Equity

$29,000

$33,000

$37,000

$42,000

Statement of Cash Flows
Operating Activities

    Inflow from Clients

$8,000

$10,000

$6,000

$12,000

Investing Activities

    Outflow to Purchase Computer

(23,000)

$   0

$   0

$   0

    Inflow from Sale of Computer

0

0

0

4,000

Financing Activities

    Inflow from Capital Acquisition

$25,000

0

0

0

Net Change in Cash

$10,000

$10,000

$6,000

$20,000

Beginning Cash Balance

$   0

$10,000

$20,000

$26,000

Ending Balance

$10,000

$20,000

$26,000

$42,000

 Units of production method