Depletion Expense Calculator
This calculator helps determine the depletion expense for a period using the common Units-of-Production method. This method allocates the cost of a natural resource over the total units expected to be extracted.
Enter the initial cost of the resource property, the total estimated number of units (e.g., tons, barrels, cubic feet) expected to be recovered, and the number of units extracted during the specific accounting period. Ensure consistent units for both total estimated and extracted amounts.
Enter Depletion Calculation Inputs
Understanding Depletion & The Units-of-Production Method
What is Depletion?
Depletion is an accounting method used specifically for natural resources (like minerals, timber, oil, and gas). It's how companies allocate the cost of extracting these resources as they are used up or sold. Think of it as the natural resource equivalent of depreciation for tangible assets (like buildings) or amortization for intangible assets.
Units-of-Production Method
This method is one of the most common ways to calculate depletion. It's based on the idea that the resource property's value is consumed in proportion to the physical units extracted. The steps are:
- Determine the total cost of the resource property (including acquisition costs).
- Estimate the total number of recoverable units from the property over its life.
- Calculate the depletion rate per unit:
Rate = Cost / Total Estimated Recoverable Units - Calculate the depletion expense for a period:
Depletion Expense = Rate * Units Extracted During Period
This calculator automates step 4, after calculating the rate from your inputs.
Depletion Expense Examples
Click on an example to see the calculation based on the Units-of-Production method:
Example 1: Simple Mineral Mine
Scenario: A company buys mining rights and estimates 50,000 tons of ore can be extracted. In the first year, they extract 10,000 tons.
1. Known Values: Cost = $100,000, Total Estimated Units = 50,000 tons, Units Extracted = 10,000 tons.
2. Calculate Rate: Rate = $100,000 / 50,000 tons = $2.00 per ton.
3. Calculate Depletion Expense: Expense = $2.00/ton * 10,000 tons = $20,000.
Conclusion: The depletion expense for the year is $20,000.
Example 2: Oil Well
Scenario: An oil property is acquired for $500,000, with an estimated 1,000,000 barrels of oil. 75,000 barrels are extracted in one quarter.
1. Known Values: Cost = $500,000, Total Estimated Units = 1,000,000 barrels, Units Extracted = 75,000 barrels.
2. Calculate Rate: Rate = $500,000 / 1,000,000 barrels = $0.50 per barrel.
3. Calculate Depletion Expense: Expense = $0.50/barrel * 75,000 barrels = $37,500.
Conclusion: The depletion expense for the quarter is $37,500.
Example 3: Timber Rights
Scenario: Timber rights are purchased for $25,000, estimated to yield 500,000 board feet (bf). 50,000 bf are harvested.
1. Known Values: Cost = $25,000, Total Estimated Units = 500,000 bf, Units Extracted = 50,000 bf.
2. Calculate Rate: Rate = $25,000 / 500,000 bf = $0.05 per bf.
3. Calculate Depletion Expense: Expense = $0.05/bf * 50,000 bf = $2,500.
Conclusion: The depletion expense for the harvest is $2,500.
Example 4: Zero Extraction Period
Scenario: A resource property costs $1,000,000 with 2,000,000 estimated units. In a specific period, *no* units are extracted.
1. Known Values: Cost = $1,000,000, Total Estimated Units = 2,000,000 units, Units Extracted = 0 units.
2. Calculate Rate: Rate = $1,000,000 / 2,000,000 units = $0.50 per unit.
3. Calculate Depletion Expense: Expense = $0.50/unit * 0 units = $0.
Conclusion: The depletion expense is $0 when no units are extracted.
Example 5: Nearly Fully Depleted Property
Scenario: A property cost $200,000 with 400,000 estimated units. Only 10,000 units remain unextracted. In the current period, 5,000 units are extracted.
1. Known Values: Cost = $200,000, Total Estimated Units = 400,000 units, Units Extracted = 5,000 units.
2. Calculate Rate: Rate = $200,000 / 400,000 units = $0.50 per unit.
3. Calculate Depletion Expense: Expense = $0.50/unit * 5,000 units = $2,500.
Conclusion: The depletion expense for this period is $2,500. (Note: Accumulated depletion would track remaining book value).
Example 6: High Cost, Low Volume
Scenario: A rare mineral deposit costs $5,000,000 but is only estimated to contain 10,000 oz. 500 oz are extracted this month.
1. Known Values: Cost = $5,000,000, Total Estimated Units = 10,000 oz, Units Extracted = 500 oz.
2. Calculate Rate: Rate = $5,000,000 / 10,000 oz = $500 per oz.
3. Calculate Depletion Expense: Expense = $500/oz * 500 oz = $250,000.
Conclusion: The depletion expense for the month is $250,000.
Example 7: Low Cost, High Volume
Scenario: A large quarry is acquired for $1,000,000 with an estimated 10,000,000 cubic yards of stone. 500,000 cubic yards are quarried.
1. Known Values: Cost = $1,000,000, Total Estimated Units = 10,000,000 cubic yards, Units Extracted = 500,000 cubic yards.
2. Calculate Rate: Rate = $1,000,000 / 10,000,000 cubic yards = $0.10 per cubic yard.
3. Calculate Depletion Expense: Expense = $0.10/cubic yard * 500,000 cubic yards = $50,000.
Conclusion: The depletion expense is $50,000.
Example 8: Small Extraction
Scenario: Property cost $50,000 with 250,000 estimated units. Only 100 units were extracted in a specific period.
1. Known Values: Cost = $50,000, Total Estimated Units = 250,000 units, Units Extracted = 100 units.
2. Calculate Rate: Rate = $50,000 / 250,000 units = $0.20 per unit.
3. Calculate Depletion Expense: Expense = $0.20/unit * 100 units = $20.
Conclusion: The depletion expense is $20 for the period.
Example 9: Extraction Equals Total Estimated Units (Full Depletion)
Scenario: Property cost $75,000 with 150,000 estimated units. In one year, all 150,000 units are extracted.
1. Known Values: Cost = $75,000, Total Estimated Units = 150,000 units, Units Extracted = 150,000 units.
2. Calculate Rate: Rate = $75,000 / 150,000 units = $0.50 per unit.
3. Calculate Depletion Expense: Expense = $0.50/unit * 150,000 units = $75,000.
Conclusion: The entire cost of $75,000 is expensed as depletion in this period.
Example 10: Extraction Over Multiple Periods (Example data)
Scenario: Property cost $1,000,000 with 1,000,000 estimated units. Period 1: 300,000 units. Period 2: 400,000 units. Period 3: 300,000 units.
1. Known Values: Cost = $1,000,000, Total Estimated Units = 1,000,000 units.
2. Calculate Rate: Rate = $1,000,000 / 1,000,000 units = $1.00 per unit.
3. Calculate Depletion Expense for each period:
- Period 1: $1.00/unit * 300,000 units = $300,000
- Period 2: $1.00/unit * 400,000 units = $400,000
- Period 3: $1.00/unit * 300,000 units = $300,000
Conclusion: The total depletion over the life of the property matches the initial cost ($300k + $400k + $300k = $1,000k).
Frequently Asked Questions about Depletion Expense
1. What costs are included in the "Cost of Resource Property"?
Primarily, this includes the acquisition cost of the property. It may also include costs related to exploration, drilling, and development, but for a simple calculation, focus on the main acquisition cost.
2. What are "Total Estimated Recoverable Units"?
This is an estimate of the total physical quantity of the natural resource (tons, barrels, board feet, etc.) that can be economically and legally extracted from the property over its entire life. This estimate often relies on geological surveys or engineering studies.
3. What does "Units Extracted During Period" mean?
This is the actual number of units of the resource that were physically removed from the property and/or sold during the specific accounting period (e.g., a month, quarter, or year) for which you want to calculate the expense.
4. What is the depletion rate per unit?
It's the portion of the resource property's cost that is allocated to each unit of the resource extracted. It's calculated as (Total Cost) / (Total Estimated Recoverable Units).
5. How is the depletion expense calculated using this method?
The depletion expense for a period is calculated by multiplying the depletion rate per unit by the number of units extracted during that period: Depletion Expense = Rate per Unit * Units Extracted.
6. Is depletion the same as depreciation?
No. Depreciation is for tangible assets (like buildings, equipment) that wear out or become obsolete over time. Depletion is for natural resources that are physically consumed or used up as they are extracted.
7. What happens if the estimate of total recoverable units changes?
If the estimate changes significantly, the depletion rate is usually revised prospectively. The remaining undepleted cost is then spread over the newly estimated *remaining* units. This simple calculator uses the initial estimate you provide.
8. Can I use this calculator for assets like machinery?
No, this calculator is specifically for natural resources using the units-of-production depletion method. Machinery would typically use depreciation methods like straight-line or declining balance.
9. What are the limitations of this calculator?
This calculator is a basic tool for the Units-of-Production method. It does not account for salvage value, formal revisions of estimates, complex cost components beyond acquisition, or tax-specific depletion rules (like percentage depletion), which can be significant in real accounting.
10. Should I use a professional accountant for depletion?
Absolutely. While this tool demonstrates the basic concept, accounting for depletion in a real business involves detailed records, potentially complex cost allocations, and adherence to accounting standards and tax regulations. This calculator is for educational and illustrative purposes only.
