A method of computing the depreciation charge for a period on a piece of machinery in which the depreciation charge is based on the number of production units manufactured by the machine. When the machinery to be depreciated is purchased an estimate is made of the total number of units of production that will be made by the machine over its lifetime. A rate per production unit is then computed and applied to the production over the life of the machinery. The formula per production unit is as follows:original cost – estimated residual value/estimated number of production units.
original cost – estimated residual value/estimated number of production units.
Unlike the straight-line method of depreciation, which treats depreciation as a fixed cost, the production-unit method treats it as a variable cost.