Wednesday, September 12, 2007

Production Method of Depreciation

The production method is based solely on the use of the machine instead of how long you have it. Calculating depreciation is very similar to the straight line method. You need to know the cost, the residual value, and the estimated units of useful life. The formula is:

(Cost - Residual Value)/Estimated Units of Useful Life

For example, The cost of the machine is $10,000 and the Residual Value is $1000. You can produce 100,000 units with it. To calculate the depreciation for 1 unit, you need to do the following:

(10,000 - 1,000) = 9000 to depreciate

9000 / 100,000 = .09 per unit

First year you make 5000 units. The depreciation for the first year is:

5000 x .09 = 450

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