Unit of Production Method

Usually, depreciation is calculated as a function of time. Use the nut-cracking machine in your peanut butter factory for a year, and it depreciates by a certain amount. The fact that you shut down the factory for six months after the elephant attack doesn't play into the equation. A year is a year.

The unit of production method uses a different standard. Instead of using fixed time intervals, it calculates depreciation in relation to usage. The amount of depreciation relates to how much an asset gets used. The more nuts you crack with the machine, the more it depreciates.

This method is often considered more accurate, since machines wear out from use, not just by getting older. Unlike your Uncle Wally, of course, who really hasn't left the couch in the last four decades, but looks like a reanimated mummy.

But, more accurate or not, this method can present a problem. It requires a more involved process. You have to actually count the number of nuts cracked to keep account of how much the machine is getting used. Or...you at least have to keep proper records about when its being used and what its workload looks like. It can become a pain.

That drawback leads a lot of companies to fall back on the simple time equation. It's just easier to track. As such, the units of production model often gets reserved for really expensive equipment...stuff where the rate of depreciation can make a serious impact on the books.