Which depreciation method is based on asset usage rather than time?

Which depreciation method is based on asset usage rather than time?

• A. Straight-Line Depreciation
• B. Accelerated Depreciation
• C. Unit of Production Depreciation
• D. Declining Balance Depreciation

Answer: (C)

Depreciation methods can be viewed as time-based versus usage-based. The usage-based approach assigns depreciation according to how much the asset is actually used. In Unit of Production depreciation, the total depreciable base (cost minus residual value) is divided by the total estimated units the asset will produce. This creates a rate per unit, and depreciation in a period is this rate times the actual units produced in that period. So if the asset is heavily used, depreciation is higher; if it’s used less, depreciation is lower, matching expense with wear and tear from usage. For example, if an asset costs 100,000, has a 10,000 residual value, and is expected to produce 50,000 units in its life, the rate per unit is (100,000 − 10,000) / 50,000 = 1.80 per unit. If 4,000 units are produced this year, depreciation expense = 4,000 × 1.80 = 7,200. This directly ties depreciation to actual usage. The other methods allocate depreciation primarily based on time or book value rather than usage. Straight-line spreads the depreciable amount evenly over each year. Accelerated and declining balance front-load depreciation based on a rate applied to book value, regardless of how much the asset was used in a given period.

Depreciation methods can be viewed as time-based versus usage-based. The usage-based approach assigns depreciation according to how much the asset is actually used. In Unit of Production depreciation, the total depreciable base (cost minus residual value) is divided by the total estimated units the asset will produce. This creates a rate per unit, and depreciation in a period is this rate times the actual units produced in that period. So if the asset is heavily used, depreciation is higher; if it’s used less, depreciation is lower, matching expense with wear and tear from usage.

For example, if an asset costs 100,000, has a 10,000 residual value, and is expected to produce 50,000 units in its life, the rate per unit is (100,000 − 10,000) / 50,000 = 1.80 per unit. If 4,000 units are produced this year, depreciation expense = 4,000 × 1.80 = 7,200. This directly ties depreciation to actual usage.

The other methods allocate depreciation primarily based on time or book value rather than usage. Straight-line spreads the depreciable amount evenly over each year. Accelerated and declining balance front-load depreciation based on a rate applied to book value, regardless of how much the asset was used in a given period.