Units of Production Depreciation

What is this formula?

The Units of Production Depreciation method calculates depreciation based on the actual use of an asset rather than the passage of time. The depreciation expense is proportional to the number of units produced during the accounting period.

When to use it

Use this method when asset wear is more closely related to production output than to age. It is commonly used for manufacturing equipment, mining machinery, extraction equipment, and industrial production assets.

Example

A machine costs $100,000.

Data:

Cost = $100,000

Salvage Value = $10,000

Estimated Lifetime Production = 500,000 units

Production During Current Year = 40,000 units

Formula:

D=U(C-S)/T

Substitution:

D=40,000(100,000-10,000)/500,000

D=7,200

Result:

Depreciation expense for the year = $7,200

Applications

Manufacturing accounting

Industrial asset management

Mining operations

Production cost allocation

Equipment performance analysis

Note

This method is an accounting estimation model. The result depends on the accuracy of the estimated total lifetime production. Significant revisions to expected production may require future adjustments to depreciation schedules. Alternative methods such as Straight-Line and Declining Balance depreciation remain widely used depending on accounting requirements.