The units-of-production method determines depreciation expense based on the amount the asset is used. The length of life of an asset is expressed in a form of productive capacity. The initial cost less any residual value is divided by productive capacity to determine a rate of unit-of-production depreciation per units of usage. Units of usage c can be expressed in quantity of goods produced, hours used, number of cuttings, miles driven or tons hauled, for instance. The depreciation expense of a period is determined by multiplying usage by a fixed unit-of-production rate of usage. This depreciation method is commonly used when asset usage varies from year-to-year.
Example:
A truck was purchased for $27,000 with a residual value of $2,000 based on a life of 200,000 miles. For the month of
February, the truck registered 400 miles of use. The depreciation expense is computed as:
| Cost – Residual/ Life in units | = Depreciation expense per unit |
| Depreciation expense per unit X Units used | = Depreciation expense |
| $27,000 – 2,000/ 200,000 | = $0.125 per mile |
| $0.125 per mile x 400 | = $ 50 Depreciation expense |
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