How is Units-of-Production Depreciation calculated?

Units-of-Production Depreciation is a method that allocates the cost of a tangible asset based on its usage, activity, or output, rather than a fixed time period. The formula for calculating Units-of-Production Depreciation focuses on the actual usage of the asset, which is often measured in miles for vehicles or hours for machinery.

The correct approach involves subtracting the salvage value from the original cost to determine the total depreciable amount. This amount is then divided by the estimated useful life in terms of units produced or miles driven to establish the depreciation rate per unit or mile. Finally, this rate is multiplied by the actual units produced or the miles driven during the reporting period to determine the total depreciation expense for that period.

This method provides a more accurate representation of depreciation as it ties the expense directly to the usage of the asset. Therefore, the correct formula reflects the appropriate calculation for Units-of-Production Depreciation.