 Hello in this lecture we will define units of production depreciation. According to fundamental accounting principles wild 22nd edition the definition of units of production depreciation is method that charges a varying amount to depreciation expense for each period of an asset's useful life depending on its usage. When we're talking about units of production we are talking about a depreciation method depreciation method being applied to property plant and equipment longer lived tangible assets that we need to allocate the cost of overtime over the useful life in accordance with the cruel principle of the matching principle. When we think about depreciation we usually compare it to the baseline method that being the straight line method meaning if we just take the cost of the equipment minus the salvage value the amount that we will receive for that after the useful life and just take that amount and divide it by the useful life then the idea is that we would expense that amount each year evenly over the useful life however there are some alternatives to the straight line method for varying reasons units of production is often thought to be more specific because rather than just using time we're going to use some other method a cost driver that might be more accurate than simply using time similar to using miles to determine the value or the diminishing value of an automobile rather than just the years of ownership let's see how this could work we're going to take a piece of equipment again it could be like a forklift or something like that property plant and equipment we're going to put it on the books at the cost so in this case we're talking about one piece of equipment that costs 250,500 we put it on as an asset because we need to then allocate the cost over the useful life the question then being how are we going to do that allocation rather than just having an even allocation we are going to use the units of production method where we can take the cost minus the salvage value the amount that we believe the equipment will be valued at after it's useful life after we're done using it in order to help us generate revenue we still think we'll be able to sell it for in this case 20,000 therefore we're going to have to depreciate over the useful life 237,500 how are we going to do that we're not just going to divide it by the number of years in this case we're going to divide it by the units to be produced over the life of course the question here is what are those units how do we get those units if we're talking about a car we could be depreciating over miles and then we'd have the total miles how how many miles do we think the car will drive we're talking about something like a printer or something that produces widgets then we might be asking how many pages do we think this thing will produce over its entire life how many widgets do we think it's going to produce if we divide that out the cost divided by the number of units to produce we can get a cost per unit allocating the cost of the equipment to the things that the equipment is actually doing miles or pages of paper or units in terms of widgets then we can use this in order to calculate the depreciation each year how well we first have to count how many miles how many pages how many widgets are made that's why it's a bit more difficult of a method but more accurate in that we're measuring what is actually being produced and take that and multiply it times the depreciation per unit that we had calculated to be and that would give us the depreciation in terms of year one and if we look at the book value then we're just going to say that the depreciation for year one is what we just calculated at 110,000 the cost 257,500 accumulated depreciation after just the one year is just that 110 book value being the 147,500 if we then record the journal entry here then the journal entry is going to be a debit depreciation recorded in the depreciation expense a credit to the accumulated depreciation recorded the accumulated depreciation as seen by this journal entry posting it here so we started off with zero and accumulated depreciation up to that contra account number that credit balance 110,000 book value of the asset now 257,500 minus the 110 we also have the depreciation expense resulting in a reduction of net income now this process would be repeated in year two again how we would count the number of miles or widgets or paper that was generated in year two and multiply that times the rate that's how much we would then do the same journal entry for in the second time period year two we would continue to do that until we get down to once again that salvage value once we hit the salvage value or if there were no salvage value we get to zero then we stop depreciation of course because we don't want to go below the salvage value we don't want to go below zero we don't want to have a negative book value obviously so this depreciation method is just an estimate that we then have to stop at that point in time in a similar way that we would stop other depreciation methods such as the double declining balance