Units of Production Method

Depreciation is a decrease in the value of assets due to normal wear and tear, the effect of time, obsolescence due to technological advancements, etc. However, depreciation includes amortization. Units of Production Method is a method of charging depreciation on assets. Let us learn about it some more.

Units of Production Method

This method of charging depreciation on the asset is based on the units produced during the year. The estimated total production of the asset is the criteria for providing depreciation.

This method is applied where the value of the asset is more closely related to the number of units it produces. Thus, in the years when the asset is heavily used, the amount of depreciation will be high.

Assets on which this method can be applied are Plant and Machinery. As their wear and tear will depend on how much we use them.

For example, a machine has a capacity to produce 1000000 meters of cloth over its useful life. Then it is advisable here to follow the units of production method.

The amount of depreciation for a year is calculated by dividing the total depreciable amount of the asset by estimated total production into units. We then multiply this figure with the number of units produced during the year.

Browse more Topics Under Concept And Accounting Of Depreciation

• Concept and Meaning of Depreciation
• Cost of Asset for Calculating Depreciation
• Straight Line Method
• Diminishing Balance Method
• Units of Production Method
• Annuity Method
• Sinking Fund Method
• Profit or Loss on Disposal of Asset
• Change in Method of Depreciation

Formula:

$$\text{Annual Depreciation} = \text{Depreciable Value} \times \frac{\text{Units produced during the year}}{\text{Estimated total production}}$$

Depreciable Value = Original cost – Scrap value

(Source: backoffice)

Solved Example on Units of Production Method

Q. M/s Cube textiles purchased machinery for ₹200000 on 1^st January. It has an estimated useful life of 10 years and an estimated residual value of ₹20000.  The firm sells the asset at the residual value at the end of the 10^th year. The machine has an expected production of 15000 units during its useful life. Now the production pattern is as follows:

Year	Production
1-3	2000 units per year
4-7	1500 units per year
8-10	1000 units per year

Calculate the amount of depreciation using the Units of Production Method. Pass necessary journal entries. Also, prepare Machinery A/c.

Ans: Calculation of depreciation under Units of Production Method:

Depreciable Value = Original cost – Scrap value = 200000-20000 = 180000

$$\text{Annual Depreciation} = \text{Depreciable Value} \times \frac{\text{Units produced during the year}}{\text{Estimated total production}}$$

Year	Annual Depreciation
1-3	180000 x 2000/15000 = 24000
4-7	180000 x 1500/15000 = 18000
8-10	180000 x 1500/ 15000 = 12000

Journal entry in the books of M/s. Cube textiles

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1st year
1 Jan	Machinery A/c	Dr.	200000
	To Cash A/c			200000
	(Being machinery purchased)
1st – 3rd year
31 Dec	Depreciation on Machinery A/c	Dr.	72000
	(24000 x 3)
	To Machinery A/c			72000
	(Being depreciation charged on machinery)
31 Dec	Profit & Loss A/c	Dr.	72000
	To Depreciation on Machinery A/c			72000
	(Being depreciation on machinery transferred to profit and loss account)
4th – 7th year
31 Dec	Depreciation on Machinery A/c	Dr.	72000
	(18000 x 4)
	To Machinery A/c			72000
	(Being depreciation charged on machinery)
31 Dec	Profit & Loss A/c	Dr.	72000
	To Depreciation on Machinery A/c			72000
	(Being depreciation on machinery transferred to profit and loss account)
8th –10th year
31 Dec	Depreciation on Machinery A/c	Dr.	48000
	(12000 x 3)
	To Machinery A/c			48000
	(Being depreciation charged on machinery)
31 Dec	Profit & Loss A/c	Dr.	48000
	To Depreciation on Machinery A/c			48000
	(Being depreciation on machinery transferred to profit and loss account)
10th year
31 Dec	Cash A/c	Dr.	20000
	To Machinery A/c			20000
	(Being machinery sold)
31 Dec	Machinery A/c	Dr.	12000
	To Profit & Loss A/c			12000
	(Being profit on the sale of machinery transferred to profit and loss account)

 Machinery A/c

Date	Particulars	Amount		Date	Particulars	Amount
Year				Year
1 – 3				1 – 3
1 Jan	To Cash A/c	200000		31 Dec	By Depreciation A/c	72000
				31 Dec	By balance c/d	128000
		200000				200000
4 – 7				4 – 7
1 Jan	To balance b/d	128000		31 Dec	By Depreciation A/c	72000
				31 Dec	By balance c/d	56000
		128000				128000
8 – 10				8 – 10
1 Jan	To balance b/d	56000		31 Dec	By Depreciation A/c	48000
10th year				10th year
31 Dec	To Profit & Loss A/c	12000		31 Dec	By Cash A/c	20000
	(profit on sale)				(sale proceeds)
		68000				68000