CFA Level IFinancial Statement AnalysisMedium
A manufacturing company purchases a machine for $120,000 with an estimated salvage value of $20,000. The machine is expected to produce 100,000 total units over its useful life. During the current year, the machine produces 15,000 units. Using the units-of-production method, what is the depreciation expense for the year?
- A$18,000
- B$12,000
- C$20,000
- D$15,000
Show answer & explanationAnswer & explanation
Correct answer: D. $15,000
Depreciation per unit = (Cost − Salvage) / Total estimated units = ($120,000 − $20,000) / 100,000 = $1.00 per unit. Depreciation expense = $1.00 × 15,000 units = $15,000.
Why the other options are wrong
- A. This results from an incorrect per-unit rate calculation, such as adding rather than subtracting salvage value.
- B. This incorrectly uses the full cost of $120,000 without subtracting salvage value in the per-unit rate calculation.
- C. This equals the salvage value coincidentally, not the correct depreciation calculation.
Units-of-Production Depreciation
A depreciation method that allocates the depreciable cost of an asset based on actual usage or output rather than time.
- Rate per unit = (Cost − Salvage)/Total estimated units
- Expense = Rate per unit × units produced in period
- Depreciation varies with production activity, unlike straight-line
Memory trick: Depreciate by output, not by the calendar.