Units of Production depreciation is supported for Capital Asset Planning

Description

Units of Production Depreciation in the context of Corporate Performance Management (CPM) software is a unique functionality which allows for more accurate long-term planning and budgeting of capital assets. This method depreciates assets based on their actual usage or production output rather than a fixed timeframe, making it an essential feature for many industries.

Example Use Case

Scenario: A manufacturing company uses CPM software for capital asset planning. The company has a high-cost machinery that is expected to produce 1,000,000 units over its useful life.

Solution: The CPM software's Units of Production depreciation functionality allows the company to record depreciation expenses based on the actual number of units produced each fiscal year. If 100,000 units are produced in a given year, the system would account for 10% of the total depreciation cost. This method provides a more accurate representation of the machinery's value and associated expenses over time.

Considerations

This is useful for things like machinery, construction equipment, mining equipment and so on which tend to wear out based on a specific output. In CPM, it is helpful to connect this depreciation type with expected unit production in your forecast. This ties it all together by driving the business based on the same metrics - including depreciation.

For reference, the Units of Production depreciation method is a way to match an asset's depreciation expense with its actual use or output. This method is most appropriate for machinery and equipment that have a variable usage rate over their useful life.

For Example:

• Cost of the Asset: $100,000
• Residual Value: $10,000
• Total Estimated Production: 500,000 units over the asset's useful life

First, calculate the depreciation rate per unit:

Depreciation Rate per Unit = (Cost of the Asset - Residual Value) / Total Estimated Production

Depreciation Rate per Unit = ($100,000 - $10,000) / 500,000 = $0.18 per unit

For each period (e.g., year, month), calculate the depreciation expense based on actual units produced:

Assuming in Year 1, the asset produces 50,000 units:

Year 1 Depreciation Expense = Units Produced in Year 1 * Depreciation Rate per Unit

Year 1 Depreciation Expense = 50,000 units * $0.18 per unit = $9,000

Questions to Ask a Vendor

• Method Availability: Does your system support the Units of Production depreciation method for capital assets planning?
• Use: Can we use existing unit forecasts in the system to also drive our depreciation using this method? Any caveats?
• Calculation Flow: Is there somewhere we can see the resolved calculation?