Units-of-production depreciation method

Definition

The units-of-production depreciation method allocates the cost of a long-term asset based on its usage, output, or activity level. It is ideal for assets whose wear and tear are more closely linked to use rather than the passage of time.

5 Must Know Facts For Your Next Test

1. It calculates depreciation expense by multiplying the cost per unit of production by the number of units produced during the period.
2. The formula for determining cost per unit is (Cost - Salvage Value) / Total Estimated Units of Production.
3. Depreciation expense varies each period depending on the asset's actual usage.
4. This method is particularly useful for manufacturing machinery and vehicles where usage levels fluctuate.
5. Unlike straight-line depreciation, this method provides a better match between expenses and revenues when production varies.

Review Questions

Related terms

Straight-Line Depreciation:

A method that allocates an equal amount of depreciation expense each year over the asset's useful life.

Declining Balance Method: An accelerated depreciation method that applies a constant rate to the declining book value of an asset.

Salvage Value:

The estimated residual value of an asset at the end of its useful life.