Unit of Production Method - Meaning, Example

The unit of production method is one technique to determine how an asset's value depreciates over time. When an asset's worth is more closely linked with the quantity of units it creates than the duration of its usage, it becomes valuable.

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Unit of Production Method Meaning

Steps to Calculated Depreciation Cost by Unit of Production Method

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Unit of Production Method Example

Facts Related to the Unit of Production Method

• When the assets produce units, the unit of production method is considered the most accurate. This allows the company to precisely monitor its revenue and losses. A chronology-based strategy might not be as precise given the situation when the assets produce units.
• In addition, when an asset begins producing units, the unit of production method is considered to decline. The process is complete only when either the machine's cost has been entirely recovered or it has produced all of the units intended.

Advantages of Unit of Production

• The method allows companies to show a larger depreciation when the asset is at its most productive.
• The method makes use of the full value of assets as the depreciation is recorded only once the asset starts producing units.
• It helps in tax deductions. The Higher the depreciation expense in the fruitful or productive years, the higher the chances of countering costs of production; thereby, aiding in higher revenue in the productive years.
• It is a more precise way for calculating profits and losses.
• It is an accurate way to figure out how the item is depreciating throughout the course of its useful life.
• It is a more suitable method for determining the asset's effectiveness.
• The method aligns depreciation with revenue.

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Disadvantages of Unit of Production

• The main disadvantage is that it ignores other potential ways in which an asset's value may decrease, considering solely its utilization as a factor in depreciation.
• It is a challenging method to implement in real life. This is true since a company actually employs a variety of tools and resources to construct a product or unit. Calculating the worth of every one of these assets would be a tedious and challenging process.
• When determining the valuations of the two identical assets, the approach may produce different answers. Any firm would want to avoid such uncertainty.
• When it comes to tax computations, the IRS prohibits using this technique.
• The technique does not apply to assets such as furniture, construction, or trade firms; it is only applicable to industrial assets.