Information needed to compute a depletion charge per unit includes the a. Amount of resources sold during the period. Cumulative amount of resources removed. Estimated total amount of resources available for removal. Amount of resources removed during the period.


Then, it can multiply the cost per unit with the units extracted and sold to get the depletion expense in the period. So, the formula requires depletion expense which is obtained by multiplying the number(no.) of units of a good sold/consumed during a particular period by depletion per unit. Hence, the total number of resources sold in a particular period is required to calculate the depletion charge. What is the definition of depletion expense? Natural resources like oil, natural gas, and coal are drilled or mined from the ground.

Compute the cost-to-retail percentage including both markups and markdowns. Calculate the cost of a unit assuming use of absorption costing. Compute the cost-to-retail percentage excluding markups but including markdowns.

Depletion Expenses cannot be accurately predetermined unless they are actually incurred. This means that unless the natural resources have been correctly extracted from the mine itself, the actual cost of the help cannot be estimated. However, in order to combat this issue, there is a need to precisely assess the value of depletion expense on a per unit basis. A coal mining firm has purchased mineral rights for $10,000,000 and spent an additional $2,000,000 to develop the property.

Changes in the Exploration Units Extracted

Total fixed costs for Randolph Manufacturing are $754,000. Total costs, including both fixed and variable, are $5,000,000 if 160,000 units are produced. The variable cost per unit is $26.54/unit. As discussed above, depletion expense is a reduction in the value of natural assets over time. Depletion expenses are non-cash and may be used in sync with depreciation and amortization.

Which of the following methods provides the most conservative estimate of ending inventory? Calculating cost-to-retail percentage excluding both markups and markdowns. Calculating cost-to-retail percentage excluding markups but including markdowns.

The unsold part of the extracted natural resource should be recorded as inventory. Natural assets are depleted in the financial statements over their useful life in a similar way as Property, Plant, and Equipment assets. The charge to the income statement is called the depletion expense. How to Calculate the Depletion Rate. The depletion charge is then created based on actual units of usage. Thus, if you extract 500 barrels of oil and the unit depletion rate is $5.00 per barrel, then you charge $2,500 to depletion expense.

Calculate the contribution margin if there is a decrease in fixed costs to $122,500. Non-cash charges are expenses unaccompanied by a cash outflow that can be found in a company’s income statement. It is typically part of the DD&A, a line of a natural resource company’s income statement.


The expects to extract 500,000 tons of coal. Based on this information, the depletion rate will be $12,000,000 divided by 500,000 tons, or $24 per ton. In the most recent period, the company extracted 1,000 tons, for which the related depletion expense is $24,000. Option b) is incorrect because the depletion charge per unit does not require the information regarding the total resources that are removed.

Model-based exploration of hypokalemia in dairy cows Scientific … –

Model-based exploration of hypokalemia in dairy cows Scientific ….

Posted: Thu, 17 Nov 2022 08:00:00 GMT [source]

All of the oil that the company extracts is sold on the worldwide oil market. The corporation is legally obligated to pay a portion of its income in taxes. Every year after this, BJ will record a depletion expense until the full $1 million of cost is allocated to the asset.

Depletion is computed by multiplying the depletion cost per unit by the

Assume that the following facts apply. The machinery falls into the MACRS 3-year class. Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance. It is included in the inventory cost of mineral. The par value of stock issued for noncash assets is never a factor in determining the cost of the assets received.

Thedepletionequation is somewhat different than a typical depreciation formula because you have to figure out an average price per unit first. Depletion expense is computed by multiplying the depletion cost per unit by the number of units extracted. Both these methods are utilized for calculating the periodic value of the respective asset/resource. Depending on the firm and its resources or assets underuse, these methods gradually reduce the value of the respective resource or asset. Coal Inc. has acquired a coal mine on 01 April 2019 for $30,00,000. The acquired mine has an estimated capacity of 20,00,000 tons of coal; the salvage value at the end is zero.

The estimated natural gas reserves reduced to 1.8 million cubic feet. The depletion rate, charge and hence the depletion costs will change. It is important to note that the depletion expense should be recorded in the period that the extracted natural resource (e.g. coal) is sold.

Calculation Depletion Cost:

Charging off depletion expense helps management and other stakeholders to determine actual profits earned during an accounting period. Calculate the budgeted profit after specific fixed costs, for Year 1 of the re-cover operation, assuming the demand can be met in full. When the land purchase or lease is completed as anticipated, the acquisition expenditures are converted to exploration costs. The complete expenses or costs connected with leasing or purchasing land, including ownership rights, are referred to as acquisition. Company ABC operates a mining operation that extracts shale oil from an oil well using heavy machinery and qualified engineers .


Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $10 million at year 0 to mitigate the environmental problem, but it would not be required to do so. However, if the firm does not deal with the problem at year 0, they would face a lawsuit at the end of project (year… Calculate the depletion of the mine and depreciation for mining facilities and equipment for the year 2022. • The depreciation of equipment is included in the cost of inventory.

For example, if the percentage were 22%, depletion expense would be gross income times 22%. However, in some cases, cost depletion must be used over percentage depletion, such as the case with standing timber. Depletion for financial statement income is calculated based on the cost of natural resources used whereas depletion for tax purposes is calculated based on revenues of resources resold. The difference will always be considered a permanent tax difference. The units of production method, is also called as units of activity method.

Multiply the cost per unit times the number of units depleted to determine the depletion expense for that year. The depreciation rate is calculated by dividing remaining depreciable cost with revised estimate of tons remaining. Round depletion and depreciation rates to four decimals. Recording depreciation on plant assets affects the balance sheet and the income statement.

Calculate the number of depletion expense is computed by multiplying the depletion cost per unit by the the company must sell in order to break even. Natural resources need capital investments for extraction. The estimated values of underlying natural resources then become the basis of cost allocations. As the resources deplete with extraction, the depletion charge accumulates on the balance sheet of the company.Companies working in natural resource industries use resource depletion methods.

The units-of-production method is used to compute depletion. Depletion expense is computed by multiplying the depletion… The accounting principle is changed the accounting estimate.


To achieve this, the company has invested $100,000 in mining coal. The reason these expenses are separately categorized lies on the fact that there is a significant amount of resources that surface from the ground. Determine the costs to be assigned to the units transferred out and in ending work in process. Cost-volume-profit analysis is based entirely on unit costs. Noncurrent assets are a company’s long-term investments for which the full value will not be realized within a year and are typically highly illiquid. Capital goods are tangible assets that a business uses to produce consumer goods or services.

Its unit contribution margin is $1.50, and the selling price is $5.50 per unit. Compute the break-even point in units. Calculation of Depletion Rate Per Unit – The depletion rate per unit of an asset or any natural resource is dependent on the total number of units which will be extracted. To calculate the rate per unit, one needs to consider the total cost less salvage value then divide it by a total number of estimated units.