Unitsofproduction

Units of production is a depreciation method in accounting in which the depreciation expense of an asset is based on its actual usage rather than the passage of time. It is appropriate for assets whose wear depends on how much they are used, such as manufacturing machinery, vehicles, or equipment where output varies with production levels. The asset’s cost is allocated over its estimated total production or output, not simply over calendar years.

Calculation and mechanics: Depreciation per unit equals (cost minus residual value) divided by estimated total units of output. Depreciation expense for a period equals depreciation per unit times the number of units produced in that period. Accumulated depreciation increases and the asset’s book value declines accordingly. This method links expense more closely to actual production activity.

Example: A machine costs 200,000, with a residual value of 20,000 and an expected total production of 100,000 units. Depreciation per unit = (200,000 − 20,000) / 100,000 = 1.80. If 15,000 units are produced in a year, depreciation expense is 27,000, and the end-of-year book value is 173,000 (assuming no other adjustments).

Advantages and limitations: Units of production provides a closer match between depreciation and asset use, particularly when output varies significantly. It is less predictable than time-based methods, and it requires accurate estimates of total units and ongoing tracking of actual production. If production volume diverges markedly from the estimate, depreciation must be revised, which can affect financial results.

Application and standards: The method is accepted under major accounting frameworks (such as IFRS and U.S. GAAP) as a legitimate depreciation method. It is commonly applied to machinery, equipment, and other assets whose wear correlates with usage rather than simply with time. See also depreciation methods such as straight-line and declining balance.