Units of Production Method of Depreciation: Formula, Examples & Calculation

What Is the Units of Production Method of Depreciation?

Most depreciation methods tie an asset's decline in value to the passage of time. The units of production method does something different — it ties depreciation to actual use.

Think of a printing press in a newspaper company. Some months it runs 24 hours a day; other months it barely moves. Why would you charge the same depreciation in a slow month as in a busy one? The units of production method (also called the units of activity method or production unit method) solves this. You depreciate the asset in proportion to how much it was actually used.

This approach sits perfectly with the matching principle in accounting — expenses should be recognised in the same period as the revenue they help generate. If the machine produced 40,000 units this year and generated revenue from each of them, the depreciation should reflect that 40,000-unit workload, not a flat annual charge.

The method is recognised under Ind AS 16 (Property, Plant and Equipment) and IAS 16 as an acceptable depreciation method when useful life is best expressed in terms of expected usage.

In This Guide

• What is the units of production method?
• Formula and two-step calculation
• Easy examples (beginner)
• Moderate examples (intermediate)
• Nuanced examples (advanced)
• Journal entry for UOP depreciation
• UOP vs SLM vs WDV comparison
• Advantages and disadvantages
• When to use units of production method
• FAQs

Units of Production Method: Formula

Unlike the straight line method which uses years, the units of production method uses output as the measure. There are two steps.

Key terms:

• Cost of Asset — purchase price plus all costs to bring the asset into usable condition (installation, freight, trial runs)
• Salvage Value — estimated residual value at the end of the asset's productive life
• Total Estimated Units — the asset's total capacity over its entire life (could be units produced, kilometres driven, hours operated, tonnes extracted)
• Actual Units Produced — what the asset actually produced in that specific year — this changes every year

The key insight: the depreciation rate per unit is fixed, but the annual charge varies because actual production varies. In a high-output year you charge more; in a low-output or idle year you charge less (or nothing at all).

🟢 Easy Examples: Units of Production Method (Beginner Level)

These examples use simple round numbers and one asset. Perfect for Class 11, Class 12, B.Com Year 1, and CA Foundation students.

Example 1 — Packaging Machine

A factory buys a packaging machine for ₹5,00,000. Salvage value: ₹50,000. Total estimated production over its life: 1,80,000 units. Actual production in Year 1: 30,000 units.

Step 1: Depreciation per unit = (5,00,000 − 50,000) ÷ 1,80,000 = 4,50,000 ÷ 1,80,000 = ₹2.50 per unit
Step 2: Depreciation Year 1 = 2.50 × 30,000 = ₹75,000

Example 2 — Four-Year Production Schedule

Using the same machine from Example 1, here is a full 4-year depreciation schedule:

At end of Year 4, accumulated depreciation = ₹4,50,000. Book value = ₹50,000 (equals salvage value). ✓

Example 3 — Mining Equipment (Tonnes Extracted)

A coal mining company buys extraction equipment for ₹12,00,000. Scrap value: ₹1,20,000. Total estimated output: 1,00,000 tonnes. In Year 1, 18,000 tonnes are extracted.

Depreciation per tonne = (12,00,000 − 1,20,000) ÷ 1,00,000 = ₹10.80 per tonne
Year 1 depreciation = 10.80 × 18,000 = ₹1,94,400

Example 4 — Vehicle Based on Kilometres

A logistics company buys a truck for ₹8,00,000. Salvage value: ₹80,000. Total estimated life: 2,00,000 km. In Year 1, the truck covers 35,000 km.

Depreciation per km = (8,00,000 − 80,000) ÷ 2,00,000 = 7,20,000 ÷ 2,00,000 = ₹3.60 per km
Year 1 depreciation = 3.60 × 35,000 = ₹1,26,000

Example 5 — Zero Production Year

Using the same truck from Example 4 — what is the depreciation in a year when the truck is not used at all (0 km)?

Depreciation = 3.60 × 0 = ₹0

This is one of the most important features of the units of production method. No usage = no depreciation. This is very different from the straight line method, which charges depreciation regardless of whether the asset was used.

🟡 Moderate Examples: Units of Production Method (Intermediate Level)

These examples involve hours of operation, installation costs, partial year adjustments, and back-calculation questions. Common in B.Com Year 2, IPCC, and CMA exams.

Example 6 — Machine Hours (Activity-Based)

A textile company buys a weaving machine for ₹9,00,000. Installation: ₹60,000. Salvage value: ₹96,000. Total estimated capacity: 40,000 machine hours. Hours used: Year 1: 6,000 hrs | Year 2: 9,000 hrs | Year 3: 8,000 hrs.

Total cost = 9,00,000 + 60,000 = ₹9,60,000
Depreciation per hour = (9,60,000 − 96,000) ÷ 40,000 = 8,64,000 ÷ 40,000 = ₹21.60 per hour

Example 7 — Printing Press (Units of Pages Printed)

A publishing house buys a printing press for ₹20,00,000. Salvage value: ₹2,00,000. Estimated life: 90,00,000 pages. Pages printed: Year 1: 12,00,000 | Year 2: 18,00,000 | Year 3: 15,00,000.

Depreciation per page = (20,00,000 − 2,00,000) ÷ 90,00,000 = ₹0.20 per page

Year 1: 0.20 × 12,00,000 = ₹2,40,000
Year 2: 0.20 × 18,00,000 = ₹3,60,000
Year 3: 0.20 × 15,00,000 = ₹3,00,000

Example 8 — Back-Calculating Total Estimated Units

A machine costs ₹6,00,000. Salvage value: ₹60,000. Depreciation per unit is ₹1.80. What is the total estimated production capacity?

Total units = (6,00,000 − 60,000) ÷ 1.80 = 5,40,000 ÷ 1.80 = 3,00,000 units

Example 9 — Calculating Actual Units from Annual Depreciation

A machine has a depreciation rate of ₹4 per unit. Depreciation charged in Year 2 was ₹1,40,000. How many units were produced in Year 2?

Units produced = 1,40,000 ÷ 4 = 35,000 units

Example 10 — Oil Well (Barrels Extracted)

An oil company drills a well at a cost of ₹50,00,000. Residual value: ₹5,00,000. Estimated recoverable reserves: 5,00,000 barrels. Extraction: Year 1: 80,000 barrels | Year 2: 1,20,000 barrels.

Depreciation per barrel = (50,00,000 − 5,00,000) ÷ 5,00,000 = ₹9 per barrel
Year 1: 9 × 80,000 = ₹7,20,000
Year 2: 9 × 1,20,000 = ₹10,80,000

This is also called depletion when applied to natural resources like oil, gas, and coal. The formula is identical to UOP depreciation.

🔴 Nuanced Examples: Units of Production Method (Advanced Level)

These examples cover asset disposal, revision of estimated output, comparison with SLM, and situations common in ACCA, CA Final, and CMA Final exams.

Example 11 — Asset Disposed Before Full Capacity Used

A machine was purchased for ₹10,00,000. Salvage value: ₹1,00,000. Estimated life: 3,00,000 units. After producing 2,10,000 units (across 4 years), the machine is sold for ₹3,50,000.

Depreciation per unit = (10,00,000 − 1,00,000) ÷ 3,00,000 = ₹3 per unit
Total depreciation charged = 3 × 2,10,000 = ₹6,30,000
Book value at disposal = 10,00,000 − 6,30,000 = ₹3,70,000
Sale proceeds = ₹3,50,000
Loss on disposal = 3,70,000 − 3,50,000 = ₹20,000

Example 12 — Revision of Total Estimated Production

A machine originally estimated to produce 2,00,000 units costs ₹8,00,000 (salvage ₹80,000). After producing 60,000 units in Year 1 and 70,000 in Year 2, engineers revise the total capacity to 2,50,000 units. What is the revised depreciation rate from Year 3?

Original rate = (8,00,000 − 80,000) ÷ 2,00,000 = ₹3.60 per unit
Depreciation already charged = (60,000 + 70,000) × 3.60 = 1,30,000 × 3.60 = ₹4,68,000
Remaining book value (start of Year 3) = 8,00,000 − 4,68,000 = ₹3,32,000
Remaining units = 2,50,000 − 1,30,000 = 1,20,000 units
Revised rate = (3,32,000 − 80,000) ÷ 1,20,000 = 2,52,000 ÷ 1,20,000 = ₹2.10 per unit

Under Ind AS 8, a change in the estimate of total production is a prospective adjustment — applied from the revision date only.

Example 13 — Comparing UOP vs SLM for the Same Machine

A machine costs ₹4,50,000. Salvage: ₹45,000. Estimated life: 5 years or 1,50,000 units.

Under SLM: Annual depreciation = (4,50,000 − 45,000) ÷ 5 = ₹81,000 per year (constant)

Under UOP: Rate = 4,05,000 ÷ 1,50,000 = ₹2.70 per unit

Notice how in Year 3 (low output of 20,000 units), UOP charges only ₹54,000 vs SLM's fixed ₹81,000. In Year 1 (high output), UOP charges more. This is the matching advantage.

Example 14 — Aircraft Flight Hours

An airline purchases an aircraft engine for ₹2,00,00,000. Residual value: ₹20,00,000. Total estimated life: 50,000 flight hours. Flight hours in Year 1: 4,200 hrs | Year 2: 5,100 hrs.

Rate per hour = (2,00,00,000 − 20,00,000) ÷ 50,000 = 1,80,00,000 ÷ 50,000 = ₹3,600 per flight hour
Year 1: 3,600 × 4,200 = ₹1,51,20,000
Year 2: 3,600 × 5,100 = ₹1,83,60,000

Example 15 — Production Exceeds Estimate in Final Year

A machine (cost ₹3,00,000, salvage ₹30,000, estimated 90,000 units) has produced 88,000 units by end of Year 4. In Year 5, the factory produces 10,000 units. How much depreciation is charged in Year 5?

Rate per unit = (3,00,000 − 30,000) ÷ 90,000 = ₹3 per unit
Depreciation already charged = 88,000 × 3 = ₹2,64,000
Remaining depreciable amount = (3,00,000 − 30,000) − 2,64,000 = 2,70,000 − 2,64,000 = ₹6,000

Even though the rate is ₹3/unit and 10,000 units were produced (₹30,000), you can only charge ₹6,000 — the remaining depreciable amount. The asset cannot be depreciated below its salvage value.

Example 16 — UOP for Goodwill or Franchise Agreement (Units of Revenue)

A franchise agreement costs ₹15,00,000 with zero residual value. The franchisor estimates total franchise sales of ₹3,00,00,000 over the agreement life. Revenue in Year 1: ₹40,00,000.

Amortisation per ₹1 revenue = 15,00,000 ÷ 3,00,00,000 = ₹0.05 per ₹1 of revenue
Year 1 amortisation = 0.05 × 40,00,000 = ₹2,00,000

This is the units of production concept applied to intangible assets — called the units of revenue method of amortisation under Ind AS 38.

Journal Entry for Units of Production Depreciation

The journal entry for UOP depreciation is the same format as any other depreciation method. What changes year to year is the amount, not the entry structure.

Using Example 1: In Year 1, the entry would debit Depreciation Expense ₹75,000 and credit Accumulated Depreciation ₹75,000. In Year 2, it would be ₹1,25,000. The amount varies — but the entry format does not. At year end, depreciation flows to the trial balance and then to the Profit and Loss account as an operating expense.

Units of Production vs SLM vs WDV: Comparison

Advantages and Disadvantages of the Units of Production Method

Advantages

• Matches the matching principle — depreciation is recognised in proportion to the benefit generated by the asset
• No charge when asset is idle — if the machine sits unused, no depreciation is recorded, giving a truer picture of cost
• Highly accurate for variable-output assets — manufacturing equipment, mining machinery, and vehicles that have measurable output
• Better cost-per-unit analysis — management can see the exact depreciation cost embedded in each unit produced
• Accepted under Ind AS 16 and IAS 16 — fully compliant for financial reporting

Disadvantages

• Requires production tracking — you must maintain records of actual units/hours produced every period, which adds administrative burden
• Difficult to estimate total capacity — total production over an asset's life is an estimate; errors affect every year's depreciation
• Not suitable for time-based assets — does not work for buildings, leasehold improvements, or assets where wear is time-driven, not output-driven
• Volatile P&L impact — a high-production year leads to a high depreciation charge, which can distort profit comparisons across years
• Not used for tax purposes in India — Income Tax Act 1961 mandates WDV method; UOP is used only for book/financial reporting purposes

When to Use the Units of Production Method

Ask yourself: does this asset wear out because of time, or because of how much it is used? If it is the latter, UOP is likely the right fit.

• Manufacturing machinery — CNC machines, lathes, stamping presses, bottling lines
• Mining and extraction — drills, excavators, conveyors, oil wells
• Transport vehicles — trucks and fleet vehicles (using km driven)
• Printing equipment — press machines (using pages printed)
• Aircraft components — engines (using flight hours or cycles)
• Natural resources — mines, quarries, oil and gas fields (depletion)
• Agricultural equipment — harvesters (using hectares harvested)

Related Accounting Guides on Eduyush

• Straight Line Method of Depreciation — the time-based alternative to UOP; ideal for buildings and furniture
• Journal Entry Examples — how to record depreciation and all other accounting transactions
• Ledger Account Format — how to post the depreciation entry to the asset and accumulated depreciation ledgers
• Trial Balance — where accumulated depreciation appears on the trial balance
• Financial Ratios — how depreciation method choice affects return on assets and asset turnover
• Types of Errors in Accounting — errors in estimating total production units that affect UOP depreciation

Frequently Asked Questions: Units of Production Method

What is the units of production method of depreciation?

The units of production method calculates depreciation based on an asset's actual usage rather than time. The formula is: Annual Depreciation = [(Cost − Salvage Value) ÷ Total Estimated Units] × Actual Units Produced in the Year. The per-unit rate stays constant; the annual charge varies with actual output.

What is the units of production method also known as?

It is also known as the units of activity method, production unit method, or activity method of depreciation. When applied to natural resources (mining, oil), it is called the depletion method. When applied to intangibles by revenue, it is the units of revenue method.

What happens under UOP when the asset is not used?

When actual production is zero, depreciation is also zero. This is the standout feature of UOP — no usage means no wear, so no charge. This is very different from SLM, which charges depreciation every year regardless of use.

Is the units of production method allowed under Companies Act 2013?

Companies Act 2013 (Schedule II) specifies useful lives and permits WDV or SLM for calculating depreciation for statutory accounts. The UOP method is not explicitly listed in Schedule II for statutory purposes. However, it is allowed under Ind AS 16 where the useful life of an asset is best expressed in terms of expected usage rather than years.

What is the difference between UOP and SLM?

SLM charges equal depreciation every year based on time. UOP charges depreciation based on actual output — more in busy years, less (or zero) in idle years. SLM is simpler; UOP better matches the matching principle for usage-driven assets.

Can UOP depreciation exceed total depreciable cost?

No. Once the accumulated depreciation equals the depreciable amount (Cost − Salvage Value), you stop. Even if the asset keeps producing, you cannot depreciate below the salvage value (see Example 15 above).