Which method allocates depreciation based on the number of units produced?

Units-of-Production Depreciation is the method that allocates depreciation based on the actual number of units produced or the usage of the asset. This approach is particularly useful for machinery and equipment that may have varied outputs over time. Instead of spreading the cost evenly over the useful life of the asset (as seen in Straight-Line Depreciation), or using accelerated methods that front-load the expense, Units-of-Production directly ties the expense to the production levels achieved, allowing for a more accurate representation of the asset's consumption and wear-and-tear.

This method is advantageous when the number of units produced fluctuates significantly because it matches the depreciation expense to the revenue generated from the asset during the period. Therefore, as production or usage increases, the depreciation expense rises accordingly, reflecting the true economic use of the asset. This delivers a more precise valuation of both the asset's contribution to revenue and its reduction in value over time, ensuring that financial statements remain aligned with the operational realities of the business.