How do you calculate depreciation using the units-of-production method?

The units-of-production method ties depreciation to actual usage rather than the passage of time. It is especially useful for assets whose wear depends on how much they are used, not how long they have been owned.

Formula:

Depreciation per Unit = (Cost - Salvage Value) / Total Estimated Units of Production

Annual Depreciation = Depreciation per Unit x Actual Units Produced That Year

Worked Example:

Brookfield Mining acquires drilling equipment for $480,000 with a $30,000 salvage value. The equipment is expected to drill 900,000 meters over its useful life.

Depreciation per meter = ($480,000 - $30,000) / 900,000 = $0.50 per meter

Industries where this method is common:

• Mining and extraction (drill bits, excavators)
• Oil and gas (wells, pumping equipment)
• Manufacturing (machines rated for specific output quantities)
• Airlines (airframes depreciated by flight hours or cycles)

What if production estimates change?

If Brookfield later revises total expected output from 900,000 to 1,000,000 meters, the depreciation rate changes prospectively — you recalculate the per-unit rate using the remaining depreciable base and remaining estimated units. You do not restate prior periods.

Revised rate = (Current Book Value - Salvage) / Remaining Estimated Units

Advantages:

• Better matching of expense to revenue (high production = high depreciation)
• More meaningful for assets driven by usage, not time

Disadvantage:

• Requires reliable estimates of total production capacity
• Annual expense is volatile if production fluctuates

Exam tip: CFA Level I will typically give you cost, salvage, total estimated units, and actual units for a year, then ask for the depreciation expense. Plug into the formula and compute. Watch for units — make sure you are consistent (hours, miles, units produced).

Check out our CFA Level I long-lived assets module for additional practice.