Definition of Units of Production Depreciation
The units of production method of depreciation (which is also referred to as the units of activity method) assumes that an asset's useful life is more related to its usage rather than the mere passage of time. Under the units of production method, depreciation during a given year will be greater when there is a higher volume of activity. In times of low usage the asset's depreciation will be less.
Example of Calculating Units of Production Depreciation
To illustrate the units of production method, let's assume that a company has a machine with a cost of $500,000 and a useful life that is expected to end after producing 240,000 units of a component part. Further, the machine's salvage value at that point is assumed to be $20,000.
Given the above assumptions, the amount to be depreciated is $480,000 ($500,000 minus $20,000). Dividing the $480,000 by the machine's useful life of 240,000 units, the depreciation will be $2 per unit. If the machine produces 10,000 units in the first year, the depreciation for the year will be $20,000 ($2 x 10,000 units). If the machine produces 50,000 units in the next year, the depreciation will be $100,000 ($2 x 50,000 units). The depreciation will be calculated similarly each year until the asset's Accumulated Depreciation reaches $480,000.
The units of production method or units of activity method could be useful for depreciating airplanes and vehicles (based on miles used), printing machines (based on pages run), DVDs (based on number of times rented), etc.