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Explain about Units of production method in depreciation.
Units of production method is a bit different from other methods of depreciation. This method is also called as units of activity and units of usage method of depreciation. In this method, depreciation is calculated based on number of units produced rather than useful life of an asset.
In year, when number of units produced high will depreciate more amount and when number of units produced low will depreciate low amount.
Formulae
Depreciation per unit = (cost – salvage value)/total estimated production unit
Depreciation expenses = depreciation rate per unit * unit produced in a particular year
Steps involved are as follows −
- Calculate total number of hours or number of units produced.
- Subtract estimated salvage value from capital cost.
- Divide with total estimated usage or production.
- Multiply with number of hours of usage.
Some of the advantages are as follows −
- Depreciation is charged based on the usage of the asset.
- Efficiency of the asset can be determined.
- More accurate to calculate profit or loss.
- More useful in manufacturing business.
Some of the disadvantages are as follows −
- Only number of produced units will take in account for calculating depreciation.
- Very difficult to calculate depreciation.
- More complexity.
- Same assets can be depreciated based on usage.
- Can’t be used for tax purpose.
The limitations are as follows −
- Can’t apply when machine is idle.
- Applicable mostly to manufacturing assets.
- Ignores efflux of time.
- Trading companies, service industry etc. will use straight line method rather than units of production method.
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