Service output method of depreciation

SERVICE OUTPUT METHOD OF DEPRECIATION

In some situations, it may not be realistic to compute depreciation based on time period. In such cases, the depreciation is computed based on service rendered by an asset. 

Let

P = first cost of the asset

F = salvage value of the asset

X = maximum capacity of service of the asset during its lifetime

x = quantity of service rendered in a period.

Then, the depreciation is defined per unit of service rendered:

Depreciation/unit of service = (P – F)/X

Depreciation for x units of service in a period = [(P – F)*x] / X

Example problem on service output method of depreciation

The first cost of a road lying machine is Rs.80,00,000. Its salvage value after five years is Rs.50,000. The length of road that can be laid by the machine during its lifetime is 75,000km. In its 3^rd year of operation, the length of road laid is 2,000km. Find the depreciation of the equipment for that year.

Given data

Purchase price, P = ₹. 80,00,000

Salvage value, F = ₹. 50,000

X = 75,000km

x = 2,000km

Formula used

D_t = [(P – F)*x] / X

Solution

D₃       = ([(P – F)*x] / X

            = [(80,00,000 – 50,000)*2,000] / 75,000

D₃       =₹. 2,12,000

Result

At the end of 3rd year,

       Depreciation =₹. 2,12,000

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