Which depreciation method considers the usage or production level of an asset to calculate depreciation?

• A. Straight-line depreciation.
• B. Accelerated depreciation.
• C. Units of production.
• D. None of the above.

Answer: (C)

The main idea is matching an asset’s expense to how much it is actually used. The units of production method does this by tying depreciation to usage or production levels. You estimate total production over the asset’s life (or total usage), subtract any salvage value, and divide by that total to get a depreciation rate per unit. Then you multiply that rate by the actual units produced in a period to determine depreciation for that period. This means the expense rises with heavier use and falls with lighter use, which is especially appropriate for equipment whose wear depends on activity, not just time.

For example, if a machine costs 500,000 and has an estimated 100,000 production units with a salvage value of 50,000, depreciation per unit is (500,000 - 50,000) / 100,000 = 4.50. If 20,000 units are produced in a year, depreciation for that year is 90,000. If the next year only 12,000 units are produced, depreciation is 54,000.

Straight-line spreads depreciation evenly over the asset’s useful life and doesn’t depend on usage. Accelerated methods allocate more depreciation earlier but still operate primarily on time or cost basis rather than actual production levels. So, when the dep­reciation should reflect actual usage, the units of production method is the best fit.