Hong Life CalculatorsUnderstanding the units-of-production depreciation calculator — concept and principle
This calculator spreads the cost of an asset over its life according to how much it is actually used, measured in units produced, machine hours or kilometres driven. It suits machinery, vehicles, mining equipment and other assets that wear out with use rather than with time. It works with any currency; the example uses US dollars.
How it is calculated
Rate per unit = (asset cost − salvage value) ÷ total expected units or hours.
Depreciation this year = rate per unit × units or hours this year.
- Asset cost: purchase price plus costs to get the asset ready for use.
- Salvage value: the amount you expect to recover at the end of its useful life.
- Total expected units / hours: the output you expect over the whole life.
The principle
Depreciation is an accounting method of matching the cost of an asset with the periods that benefit from it. When an asset's wear depends on use, a busy year consumes more of its life than a quiet year, so charging cost per unit of output matches expense to the revenue that output generates. Only the depreciable base (cost minus salvage) is spread, because the salvage value is not used up. The international standard IAS 16 lists the units-of-production method alongside the straight-line and diminishing-balance methods and asks companies to pick the one that best reflects how the asset's benefits are consumed.
Worked example
- Depreciable base = $120,000 − $20,000 = $100,000.
- Rate per unit = $100,000 ÷ 100,000 = $1.00.
- Depreciation this year = $1.00 × 18,000 = $18,000.00.
- Book value at year end = $120,000 − $18,000 = $102,000.
How to read the result
The yearly charge rises and falls with activity, so it is not a sign of a problem when it changes. Keep a running total: accumulated depreciation should never exceed the depreciable base, and book value should not fall below salvage value. If you realise the total expected output was wrong, revise the estimate and spread the remaining base over the remaining units from that point on.
Common mistakes
- Forgetting to subtract salvage value.
- Mixing units, for example entering lifetime hours but annual kilometres.
- Continuing to depreciate after accumulated depreciation reaches the base.
- Assuming the method is accepted for tax; tax rules often prescribe other methods.
Frequently asked questions
When is units-of-production better than straight-line?
When usage varies a lot from year to year and wear is driven by use, such as for trucks, printing presses or excavators.
Can I use machine hours instead of units?
Yes. Any measure that tracks how the asset is used works, as long as the lifetime total and the yearly figure use the same measure.
What happens if the asset produces more than expected?
Stop when accumulated depreciation equals cost minus salvage. Revise the estimate earlier if you can see it coming.
Sources: IFRS Foundation, IAS 16 Property, Plant and Equipment · Kieso, Weygandt & Warfield, Intermediate Accounting (Wiley)