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The Corporate Finance Institute Accounting
Units-of-Production
Under this method, the depreciation expense per unit produced is
determined by dividing the fair value less residual value of the asset
with the useful life in units. This method gives a higher depreciation
expense when production is high to match the usage of the equipment.
This method is also most useful for production machinery.
Unit Depreciation Expense = (Fair Value – Residual Value) / Useful Life in Units.
Periodic Depreciation Expense = Unit Depreciation Expense x Units Produced
For example, Company A has a machine worth $100,000 with a residual
value of $5,000. Production units is 95,000. Thus, unit depreciation
expense is ($100,000 – $5,000) / 95,000 = $1. In a year, company A
produces 10,000 units and incurs a depreciation expense of $10,000.
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