What is Units of Production Depreciation?
Units of production depreciation is a method that allocates the depreciable cost of an asset based on its actual usage or output during the period, rather than the passage of time. It is suitable for assets whose wear depends on activity.
How It Works
- Estimate the total expected output of the asset over its life.
- Compute the depreciation rate per unit = (cost − residual value) ÷ total expected output.
- Record actual output for each period.
- Compute depreciation = rate per unit × actual output for the period.
- Stop depreciation when the carrying amount equals the residual value.
Saudi Context
Saudi manufacturers, mining operators, and power generators use units-of-production for heavy machinery, kilns, and turbines under SOCPA-adopted IAS 16. ZATCA’s income tax depreciation rules are different, often leading to a deferred tax adjustment.
Example
A machine cost SAR 1M with residual SAR 100K and an expected output of 90,000 units. Rate per unit = SAR 10. If 12,000 units are produced in year 1, depreciation = 12,000 × 10 = SAR 120,000.