Legal Definitions - units-of-output depreciation method

The units-of-output depreciation method is an accounting technique used to spread the cost of a tangible asset over its useful life, based on how much the asset is actually used or how much it produces, rather than simply the passage of time. This method assumes that an asset's value decreases more directly with its physical wear and tear from usage or its productive output.

To apply this method, a business first estimates the total number of units an asset is expected to produce or the total amount of work it is expected to perform over its entire lifespan. The depreciation expense for a given accounting period is then calculated by multiplying the asset's cost per unit of output by the actual number of units produced or used during that specific period. This approach is particularly suitable for assets whose wear and tear are directly tied to their activity levels, such as machinery, vehicles, or equipment.

Here are some examples illustrating the units-of-output depreciation method:

• Example 1: Industrial Manufacturing Robot

  A car manufacturing plant purchases a specialized robotic arm for its assembly line. The arm is designed to perform 10 million welds over its operational lifetime before needing replacement. The plant's accountants would use the units-of-output method to depreciate this asset. If, in its first year, the robotic arm performs 1.2 million welds, the depreciation expense for that year would be calculated based on 12% (1.2 million welds / 10 million total welds) of the arm's total depreciable cost. This method accurately reflects the wear and tear directly linked to the robot's productive work, rather than just the passage of time.

• Example 2: Commercial Printing Press

  A large printing company invests in a new high-speed printing press. The press is estimated to have a useful life of 500 million printed pages. To account for its diminishing value, the company adopts the units-of-output depreciation method. In a particularly busy quarter, the press prints 25 million pages. The depreciation expense for that quarter would then be calculated as 5% (25 million pages / 500 million total pages) of the press's total depreciable cost. This links the expense directly to the actual volume of work performed by the machine, which is a key factor in its wear and tear.

• Example 3: Heavy-Duty Mining Truck

  A mining company acquires a fleet of heavy-duty trucks designed to transport ore. Each truck is estimated to have a useful life of 250,000 operating hours before requiring a major overhaul or replacement. The company decides to depreciate these trucks using the units-of-output method. If one truck operates for 2,500 hours in a given month, the depreciation expense for that truck for the month would be 1% (2,500 hours / 250,000 total hours) of its total depreciable cost. This approach ensures that the cost of the truck is expensed in proportion to its actual usage and the wear it experiences in the demanding mining environment.