Wize University Introduction to Financial Accounting Textbook > Long-Term Assets
Units of Production Method
Popular Courses
COMM 217
Concordia University
ACCT 2301
The University of Texas at Dallas
Intro to Financial Accounting
General Course
COMM 293
University of British Columbia
Intro to Financial Accounting
University Study Guides
MGCR 211
McGill University
ACCT 1220
University of Guelph
Intro to Financial Accounting
University Study Guides
ACCT 217
University of Calgary
ADMS 2500
York University
COMMERCE 1AA3
McMaster University
ACCTG 211
University of Alberta
COMM 111
Queen's University
ADM 1340
University of Ottawa
BU127
Wilfrid Laurier University
RSM219H1
University of Toronto
ACCT 2301
Houston
ACCT 2301
Houston
COMM 1101
Dalhousie University
AFM 101
University of Waterloo
0:00 / 0:00
Units of Production Method
The units of production method is a usage-based depreciation method most commonly used for assets like vehicles and machines. It assigns a value to each unit produced rather than time.
Characteristics of the Units of Production Method
- Annual depreciation fluctuates based on usage
- Useful life is expressed in units, not years
Watch Out!
An asset cannot be depreciated below its carrying value, even if the company continues using it.
Units of Production Formula
Wize Tip
This method of depreciation does not require an adjustment for time because it is based on activity.
0:00 / 0:00
Example: Units of Production Method
On April 1st, 2020, Wize Corp. purchased a used machine to use in its operations by signing a 5-year, $500,000 note at 5% interest. Closing fees for the transactions totalled $5,000 which included (notary fees and brokerage). The purchase was also subject to 10% sales tax which was paid in cash at the time of purchase. Wize Corp. paid $10,000 to a shipping company to delivery and install the machine at the company's facility, and spent another $6,000 repairing the machine's defects prior to putting it in use. The company's fiscal year ends December 31st.
The acquisition cost of the machine totalled $521,000, and the company estimates that it will be used for 500,000 machine hours and have a residual value of $11,000.
Using the units of production method, determine the depreciation expense to be recorded on December 31st, 2020 and 2021 assuming the machine was used for 70,000 and 123,000 machine hours in 2020 and 2021 respectively.
Practice: Units of Production Method
On February 1st, 2020, KG Corp. purchased machinery for $90,000 cash. The company also had to pay $10,000 for delivery and installation. The machine has an estimated useful life of 100,000 units and a residual value of $4,000. The company's fiscal year ends October 31st and it depreciates its machinery using the units of production method. The machine will be used to produce 9,000 units before October 31st, 2020 and another 11,800 units between November 1st, 2020 and October 31st, 2021.
Calculate the depreciation expense for the years 2020 and 2021.
Practice: Units of Production Method
American Airlines depreciates its aircrafts using the units of production method. It purchased an Airbus A380 in 2004 for $400 million and expect it will be used 165,000 flight hours before it is sold for $20 million.
If the Airbus A380 has flown 150,000 hours as of December 31st, 2020, and during 2021 is scheduled to fly 20,000 hours, how much depreciation will be reported on the 2021 income statement?
Do not round your work and round your answer to the nearest dollar.