The calculation for annual depreciation using the units of o

Solution

Annual Depreciation using the units of output method

= Depreciation rate per unit x Units of output produced

Depreciation rate per unit

= [ Cost of the Assets – Salvage Value ] / Estimated Total Number of Units Produced

You can understand the concept better by going through the following example [ For your understanding Only ]

QUESTION

A Company purchased equipment for $270,000. The equipment was expected to have a useful life of three years or Estimated total production of 100,000 Units , and a residual value of $10,000. The equipment produced 40,000 Units in Year 1, 40,000 Units in year 2 and 20,000 units in Year 3. Calculate the depreciation under units of output method

ANSWER

Depreciation rate per unit = [ 270,000 – 10,000 ] / 100,000 Units = $2.6 per unit

Depreciation Year 1 = 40,000 Units x $2.6 = $104,000

Depreciation Year 2 = 40,000 Units x $2.6 = $104,000

Depreciation Year 3 = 20,000 Units x $2.6 = $52,000