Units of production depreciation spreads an asset's depreciable cost over the total output or usage you expect from it, rather than over a number of years. Each period's charge depends on how much the asset was actually used. A machine that runs flat out in a busy year gets a large charge; one that stands idle gets little or none.
IAS 16 names it as one of the standard methods, alongside straight-line and diminishing balance, and US GAAP accepts it too. It suits assets whose wear tracks use more closely than time.
The formula
Worked example: full schedule
A packaging machine costs $30,000, has a salvage value of $5,000 and is expected to run 10,000 hours over its life.
| Year | Hours used | Depreciation ($2.50/h) | Accumulated depreciation | Closing NBV |
|---|---|---|---|---|
| 1 | 2,400 | $6,000 | $6,000 | $24,000 |
| 2 | 3,100 | $7,750 | $13,750 | $16,250 |
| 3 | 1,800 | $4,500 | $18,250 | $11,750 |
| 4 | 1,500 | $3,750 | $22,000 | $8,000 |
| 5 | 1,200 | $3,000 | $25,000 | $5,000 |
| Total | 10,000 | $25,000 |
If the machine runs another 300 hours in year 6, there is no further charge: net book value never goes below salvage value. Straight-line over 5 years would have charged $5,000 every year regardless of use.
Revising the estimate
Total expected units is an estimate and should be reviewed with useful life each year-end. A change applies going forward only.
Units of production vs time-based methods
| Item | Units of production | Straight-line | Accelerated (DDB, SYD) |
|---|---|---|---|
| Charge driven by | Actual use | Time | Time, front-loaded |
| Idle year | Little or no charge | Full charge | Full (declining) charge |
| Data needed | Usage reading each period | Dates only | Dates only |
| Good fit | Production machinery, vehicles, mining equipment | Assets used evenly | Assets most productive when new |
Note that IAS 16 does not allow depreciation based on revenue generated by the asset. Units of production must use a physical measure of use, not sales value.
Examples by sector
- Manufacturing: a moulding press depreciated per cycle, with cycle counts taken from its controller each month.
- Logistics: trucks depreciated per kilometre from odometer readings, so a vehicle parked for a quarter carries little cost.
- Construction: an excavator depreciated per engine hour, since use varies sharply between projects.
Common mistakes
- Unreliable readings. The method is only as good as the meter readings behind it.
- Depreciating past salvage when the asset outlasts its expected units.
- Choosing it to smooth profit. The method should reflect how the asset is consumed, not reporting goals.
- Ignoring time-based wear. An asset that also ages or becomes obsolete when idle may suit a time-based method better.
Spreadsheet vs software
In Excel or Google Sheets, units of production needs a usage column filled in every period, then units × rate, capped at cost minus salvage. The difficulty is getting the readings: they sit on meters, in telematics or in operators' logs, and someone has to copy them in on time. The free depreciation calculator lets you test the rate before you commit to the method.
Units of production in Asetavo
Units of production is one of the eight methods in Asetavo depreciation (Business plan), calculated as period units ÷ total units × depreciable base, with NBV floored at residual value. A dedicated usage input for units-of-production runs is on the roadmap, so confirm how you will feed usage readings before choosing this method in Asetavo.
