Legal Definitions - unit depreciation method

The unit depreciation method is an accounting technique used to allocate the cost of an asset over its useful life based on its actual usage or output, rather than simply the passage of time. Instead of depreciating an asset by a fixed amount each year, this method calculates depreciation based on measurable units of activity, such as the number of items produced, the hours an asset operates, or the miles it travels. This approach is particularly useful for assets whose wear and tear are directly related to their activity level, providing a more accurate reflection of how much of the asset's value has been "used up" in a given period.

• Example 1: A Commercial Printing Press

  A large printing company purchases a new industrial printing press for $750,000. Based on manufacturer specifications and historical data, the press is estimated to have a useful life of 15 million pages. Using the unit depreciation method, the company calculates a depreciation rate per page. If the press produces 3 million pages in its first year of operation, the depreciation expense for that year would be calculated based on those 3 million pages. In a subsequent year where only 1.5 million pages are printed due to lower demand, the depreciation expense would be proportionally lower.

  This example illustrates the unit depreciation method because the depreciation expense is directly tied to the actual output (pages printed) of the asset. The more the press is used, the greater the depreciation, accurately reflecting the consumption of its useful life through production.

• Example 2: A Heavy Construction Excavator

  A construction firm buys a new excavator for $300,000. The manufacturer estimates its useful life to be 10,000 operating hours. The firm decides to use the unit depreciation method based on hours of operation. In the first year, the excavator is heavily utilized on a major project, logging 2,000 operating hours. In the second year, due to fewer projects, it only operates for 800 hours.

  Here, the depreciation expense for the excavator each year directly corresponds to the number of hours it was actively used. This method accurately allocates more of the asset's cost to periods of high usage and less to periods of low usage, reflecting the actual wear and tear and consumption of its economic benefits.

• Example 3: A Fleet of Delivery Vans

  A local bakery purchases a fleet of five new delivery vans for a total of $200,000. The vans are expected to have a useful life of 250,000 miles each. The bakery opts for the unit depreciation method based on mileage. In a particular year, one van travels 50,000 miles, another travels 30,000 miles, and a third travels only 15,000 miles.

  This scenario demonstrates the unit depreciation method because the depreciation for each individual van is calculated based on the actual miles it has traveled during the period. Vans that cover more ground experience higher depreciation, aligning the expense with their specific usage and the corresponding reduction in their remaining useful life.