In the units of production method, which factor is used to determine depreciation?

• A. Time-based usage
• B. Actual production or usage
• C. Estimated service life
• D. Cost

Answer: (B)

In the units of production method, depreciation is driven by how much the asset is actually used. You determine a depreciation amount based on the number of units produced (or hours used, etc.) rather than simply the passage of time. The typical approach is to compute a per-unit depreciation: (cost minus salvage value) divided by total estimated units the asset will produce. Then multiply that per-unit amount by the actual units produced in the period to get depreciation expense. This makes depreciation reflect wear and tear from usage, which is ideal for machinery or equipment whose deterioration depends on how heavily it’s used. Time-based depreciation would allocate evenly over time, not by usage; estimated service life helps estimate total units or periods but doesn’t by itself tie expense to actual production; and cost is the starting point for the computation, but the factor that determines each period’s expense in this method is actual production or usage.