Which method matches depreciation with the fraction of production capacity used in a period?

Which method matches depreciation with the fraction of production capacity used in a period?

• A. Accretion
• B. Straight Line Method
• C. Units of Production Method
• D. NBV

Answer: (C)

Depreciation should reflect how much of the asset’s productive capacity is used in a period. The Units of Production method does exactly that by tying expense to actual output. You estimate total units the asset will produce over its life and compute depreciation per unit as (cost minus residual value) divided by estimated total units. The depreciation for a period is then that per-unit amount times the number of units produced in that period. This means higher production periods incur more depreciation, and lower production periods incur less, aligning expense with how much of the asset’s capacity is used. Other methods don’t align with usage. Straight-line spreads the depreciable base evenly over time, regardless of how much the asset is worked. Accretion relates to increasing liabilities over time rather than allocating depreciation. Net book value is simply the asset’s carrying amount, not a method of depreciation itself.

Depreciation should reflect how much of the asset’s productive capacity is used in a period. The Units of Production method does exactly that by tying expense to actual output. You estimate total units the asset will produce over its life and compute depreciation per unit as (cost minus residual value) divided by estimated total units. The depreciation for a period is then that per-unit amount times the number of units produced in that period. This means higher production periods incur more depreciation, and lower production periods incur less, aligning expense with how much of the asset’s capacity is used.

Other methods don’t align with usage. Straight-line spreads the depreciable base evenly over time, regardless of how much the asset is worked. Accretion relates to increasing liabilities over time rather than allocating depreciation. Net book value is simply the asset’s carrying amount, not a method of depreciation itself.