With the units of production method, depreciation expense is charged with each unit of production. The formula for units of production depreciation is as follows:
- Compute the depreciation charge per unit of production
(Cost minus salvage value) / Total estimated units of production = Depreciation charge per unit of production
- Compute the depreciation expense
Depreciation charge per unit of production * units of production in current accounting period = periodic depreciation expense
Example:
Uncle Joe bought a car for $24,000. Uncle Joe estimates the total number of miles driven will be 100,000 based on the manufacture productive capacity guideline. The salvage value is $4,000.
Within the first 4 years, Uncle Joe drives the following miles:
Year 1: 45,000 miles
Year 2: 15,000 miles
Year 3, 20,000 miles
Year 4: 30,000 miles
Using the units of product method, Uncle Joe will compute the depreciation as follows
- Compute the depreciation charge per mile
(24,000 minus 4,000)/100,000 = .20cents per mile
- Compute the depreciation expense
| Year | Cost per mile | Miles Driven | Depreciation Expense |
| 2013 | .20 | 45,000 | 9,000 |
| 2014 | .20 | 15,000 | 3,000 |
| 2015 | .20 | 20,000 | 4.000 |
| 2016 | .20 | 30,000 | 6, 000 4,000 |
You cannot depreciate below the salvage value