Unit-of-Production Depreciation
A depreciation method that allocates an asset's cost based on its actual output or usage rather than elapsed time.
What is Unit-of-Production Depreciation?
Unit-of-production depreciation allocates the cost of an asset proportionally based on its actual usage or output rather than the passage of time. This method is appropriate for assets whose wear correlates directly with production volume, such as mining equipment, oil wells, or manufacturing machinery. Depreciation expense fluctuates with output, matching costs to revenue more precisely than time-based methods.
Example
An oil company acquires a well for $10 million with an estimated reserve of 1 million barrels. If it extracts 80,000 barrels in a year, depreciation is $800,000 (80,000 ÷ 1,000,000 × $10M), directly linked to production activity.