In the unit production method, what is used to calculate the depreciation?

In the unit production method of depreciation, the calculation is based on the actual usage of the asset as measured by the quantity of units produced, miles driven, or hours used during the year. This method aligns the expense recognition of the asset directly with its productivity or output.

The core idea is that depreciation reflects the wear and tear of the asset as it is utilized in generating revenue. By focusing on the specific measure of output, businesses can allocate depreciation expense more accurately according to how much the asset contributes to production within the period.

For instance, if a machine is expected to produce a total of 100,000 units over its useful life, the depreciation expense for each unit produced can be calculated by dividing the initial cost of the asset by the total expected production. This allows for a more precise expense reflection based on the actual production, making it an effective method for industries with varying levels of asset utilization.