In the Units of Production method, what is calculated to determine depreciation?

In the Units of Production method, depreciation is calculated based on the number of units that an asset is expected to produce over its useful life. This method emphasizes the actual usage of the asset rather than simply an elapsed time period.

To determine depreciation using this approach, the total depreciable cost of the asset (the original cost minus any salvage value) is divided by the estimated total number of units the asset can produce during its lifetime. This calculation provides a depreciation expense per unit. As the asset is used and produces goods, the depreciation expense is recorded based on the actual number of units produced in that accounting period. This means that heavier usage of the asset results in greater depreciation expense, reflecting the asset's wear and tear due to production activities.

This method aligns depreciation more closely with the actual utility and productivity of the asset, making it a practical choice for businesses where production volume can vary significantly.