Units of Production

Why use this method?
The units of production (UOP) method allocates depreciation expenses according to actual physical usage. Assets with an indefinite useful life but a limited productive capacity are good candidates for this method. The UOP method is particularly appropriate when the usage of a fixed asset varies greatly from year to year.

For example, the blade of an industrial circular saw might be good for 10,000 hours of use, but it could take seven years, ten, or even fifteen to use up those 10,000 hours. In this case, the useful life is not clear, but the total productive capacity is. Or, the saw might be used for 5,000 hours in the first two years, and only sporadically for the next three. The UOP method helps solve these problems by allocating the cost of the saw blade to the accounting periods in which it is actually used.

Units of production relies on an estimate of the productive capacity of the fixed asset. GAAP (generally accepted accounting principles) requires a "systematic and rational" estimate of the number of units - be they hours, products, miles, or another measure - that the property will produce.

To find the depreciation expense for a year, a quarter, or a month, multiply the number of units produced during that period by the UOP rate. You can calculate your UOP rate and compare it with other depreciation methods using this Decision Tool.

How does it work? 

Depreciation expense = units produced this year X UOP rate UOP rate = cost less salvage value estimated number of units to be produced during estimated useful life