Question

Casey Electronics has a piece of machinery that costs $300,000 and is expected to have a useful life of 6 years or 40,000 hours. Residual value is expected to be $50,000. Using the units-of-production method, what is depreciation expense for the first year assuming it was used 6,000 hours

Answer 1

Solution:

The unit-of-production approach allocates depreciation on the basis of the usage of the commodity.

The first step is to measure depreciation per unit by calculating the sum of less residual value by usable life in units.

For this scenario, we measure ($300,000-$50,000)/40,000 hours

= $6.25 per computer hour as the deprecation cost per device.

That number is compounded by the real use for the year.

In this scenario, 6,000 hours * $6.25 depreciation cost

= $37,500 depreciation bill.