This method of calculating depreciation ties asset devaluation directly to its usage. For example, a vehicle used for deliveries might depreciate based on miles driven, while a manufacturing machine might depreciate based on units produced. This approach allocates the cost of the asset more accurately over its useful life than straight-line or declining balance methods, reflecting the actual wear and tear experienced.
Accurately reflecting usage patterns provides several advantages. It improves the matching of revenue with expenses, leading to more realistic financial statements. This enhanced accuracy can facilitate better decision-making regarding asset replacement and capital budgeting. Historically, this method has been particularly relevant in industries with high asset utilization variability, such as mining, manufacturing, and transportation, where the traditional time-based depreciation methods proved inadequate for capturing the true cost of asset usage.
