In the method the depreciation is allocated in proportion to the degree the asset is used for production because the estimation of useful life is done in terms of units of output and not a calendar time period. A machine has the capacity to produce limited number of items and therefore as an item is produced the total number of possible units is reduced. As a result of this limitation, the depreciation is related to usage and not to time. In this method an estimate of the capacity of the asset to produce units of a certain item is made. It may be clarified that units-of-production capacity might be miles driven by vehicles, flying hours by aircraft engine, number of stampings for stamping machine, tons of coal in a mine, number of operation hours a machine will provide and so on. The depreciation expense for a particular accounting period is calculated as under:

Depreciation Expense Per Unit         =            Cost minus Salvage Value
Total Estimate Units of Output Or Service Hours or Any Other Unit

Depreciation expense for the accounting period = Depreciation expenses per unit (as calculated above) multiplied by the number of units (of output or service hours or any other unit used) pertaining to the accounting period.

For more help in Units of Production Method click the button below to submit your homework assignment