Why units of production matter to a first-time founder
This method can match an asset’s depreciation expense more closely to the revenue it helps generate when wear depends on use. It prevents a machine used heavily this year from receiving the same charge as one left idle. Founders still need a credible lifetime-output estimate and must follow the accounting and tax rules that apply.
Examples of units of production
A machine costs ₹11 million, should retain a ₹1 million residual value and is expected to make 500,000 parts. Its depreciable amount is ₹10 million, or ₹20 per part. If it produces 80,000 parts this year, the units-of-production depreciation charge is ₹1.6 million, subject to the applicable reporting rules.
Common misunderstanding
It is not the same as straight-line depreciation, which spreads the depreciable amount evenly across time. The method also does not mean each product absorbs only ₹20 of total cost; depreciation is one production expense among materials, labour and overhead. Estimates must be reviewed when expected output changes materially.
When to use it
Consider it for machinery, vehicles or extraction equipment whose economic use can be measured reliably in units, hours or distance. Ignore it for assets whose value mainly declines with time or obsolescence. Ask an accountant whether the method is permitted and appropriate under your reporting framework and whether tax depreciation follows different rules.