The calculation of depreciation based on production volume, rather than time, is a method frequently employed in accounting. It allocates an asset’s cost over its useful life based on actual usage. The formula involves determining a depreciation rate per unit of output by dividing the assets cost less its salvage value by the total estimated units the asset will produce. This rate is then multiplied by the actual number of units produced during a given period to arrive at the depreciation expense for that period. For example, a machine costing $100,000 with a salvage value of $10,000 and an estimated total production of 450,000 units would have a depreciation rate of $0.20 per unit. If 50,000 units were produced in a year, the depreciation expense would be $10,000 for that year.
This method provides a more accurate reflection of an assets consumption, particularly when its usage fluctuates significantly from period to period. It aligns depreciation expense with revenue generation, which can be beneficial for financial reporting. Unlike straight-line depreciation, which allocates an equal expense each period, or accelerated methods, which front-load depreciation, this approach directly relates depreciation to actual output. It is often favored in industries where asset utilization varies substantially, such as manufacturing or resource extraction. Accounting standards often permit the use of this method when it more reliably reflects the pattern in which the asset’s economic benefits are consumed.
