In this presentation we talk about two less-commonly used methods of calculating depreciation. These are called the units of production method and the reducing balance method.

1. Depreciation Methods:
Units of Production and
Reducing Balance
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2. Last time the topic of the
presentation was the
straight-line method of
calculating depreciation.

3. In this presentation
we’ll cover the other
two main methods
that are much less
commonly used.

4. Firstly, the units of production method.

5. This is especially suited
to the depreciation of
equipment that is used
in a manufacturing
process…….

6. …….since the amount of
depreciation that is
charged in an
accounting period is
directly related to the
output of the machinery
or equipment during that
time.

7. There are three components to the
calculation;
the cost of the equipment

8. its expected total unit
output over its useful
life
any residual value the
equipment may have
at the end of its useful
life

9. Let’s use the same equipment that
we used in the straight-line example
to illustrate how the units of
production method works.

10. If you recall, the
equipment cost
100,000 and had
an estimated
residual value of
20,000, leaving us
with a depreciable
value of 80,000.

11. But with the units of production
method, the useful life is determined
by units produced by the equipment
rather than by time, as was the case
in our straight-line method example.

12. So, let’s say that
the directors of the
business estimate
that the equipment
will produce 40,000
units before it has
to be scrapped.

13. We can now calculate what the
depreciation amount will be for each unit
produced, using the following formula;

14. 80,000
= 2
40,000
estimated total units of production
The depreciable value

15. This means that each time the equipment
produces one unit, there will be
depreciation of 2 accounted for as an
operating expense.

16. At the end of the accounting
period, the total number of units
produced during the year is
multiplied by 2 to arrive at the
total amount of depreciation for
that piece of equipment for that
year.

17. Secondly, the other
method of calculating
depreciation is called
the reducing balance
method

18. The reducing balance
method is suited to
those assets that
quickly become
technologically
obsolete…….

19. …….or which use a
greater proportion of
their productive value
in the early years of
ownership.

20. In this method the directors of the
business select a percentage of the
value of the asset that will be applied in
each accounting period to calculate
depreciation.

21. The three components of this calculation
are;
the cost of the asset

22. its expected useful life
measured by time
a percentage of the
value that will be
applied annually to
depreciate the asset
over its expected useful
life

23. Going back again to
our example of a
piece of equipment
costing 100,000 and
with an expected
useful life of 5
years…….

24. …..let’s say that the directors decide to
depreciate it at 50% per financial year
and, to keep things simple, let’s also say
that the business acquired the equipment
on the first day of the financial year.

25. In the first year, the
amount of depreciation
would be calculated as
follows;

26. The initial cost of 100,000
multiplied by 50%, which results in
a depreciation figure for the first
year of 50,000.

27. Depreciable
value of asset
Depreciation
percentage
Amount of
depreciation
Depreciated
value of asset
Year 1 100,000 50% 50,000 50,000
So, it looks like this…….

28. In the second year,
the initial cost of the
equipment is not used
in the calculation.
Instead the reduced
balance of 50,000 is
used as the base
figure.

29. The calculation of
depreciation is then;
The reduced balance
of 50,000 multiplied by
50%, which gives us a
depreciation figure for
the second year of
25,000.

30. Depreciable
value of
asset
Depreciation
percentage
Amount of
depreciation
Depreciated
value of
asset
Year 1 100,000 50% 50,000 50,000
Year 2 50,000 50% 25,000 25,000
So now, it looks like this…….

31. In the following year, that reduced
balance of 25,000 is used as the base
figure in the calculation.

32. That same process
then continues until the
equipment reaches the
end of its useful life or
is disposed of.

33. Depreciable
value of
asset
Depreciation
percentage
Amount of
depreciation
Depreciated
value of asset
Year 1 100,000 50% 50,000 50,000
Year 2 50,000 50% 25,000 25,000
Year 3 25,000 50% 12,500 12,500
Year 4 12,500 50% 6,250 6,250
Year 5 6,250 50% 3,125 3,125
Like this…….

34. Whatever balance is left at the end of
the useful life is deemed to be the
equipment’s residual value.

35. We do hope that you enjoyed this presentation.
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