Units-of-Production Depreciation

18.11.2016 · Enterprise finance

There are certain types of enterprises that rely on a seasonal demand in their activity. So there is no point to write off depreciation costs every month. In such case it makes more sense to write off a part of fixed assets value according to the quantity of manufactured goods. This method is called a unit-of-production depreciation.

The main advantage of this method is its simplicity, rationality and regularity.
The last one makes a better correlation of annual depreciation amount with operation activity revenues when products or services are not produced systematically during the whole year.

Despite the methodical and periodical advantages, this method is not often used by companies either because of the impossibility to apply it or complexity to determine the precise quantity of production manufactured by means of a given type of fixed assets.

The main disadvantage of this method is its complexity.

Sometimes manufacturing method is called unit-of-production depreciation. The basic point of this method is an assumption that the actual revenue from exploitation of a particular asset is related with the units of product manufactured by this type of asset in the accounting period.
Many accountants consider that such type of equipment as machines (vehicles) must write off their costs in proportion to the amount of goods manufactured in every accounting period. They are also convinced that the main part of working assets assists in revenue making and depreciates only when it is used in a manufacturing process.

Thus, this method of depreciation is the best one for the vehicles because it takes into consideration the covered distance accrording to a speedometer.

When it comes to the machines that work in manufacturing departments, there are different approaches here. As a rule, the quantity of manufactured products cannot be related to some specific machine, since different kinds of machines and equipment are involved in a technological and manufacturing process.

You can experiment with the calculation of unit-of-production depreciation using free online depreciation calculator.