This methodology of calculating depreciation ties asset devaluation on to its utilization. For instance, a car used for deliveries may depreciate based mostly on miles pushed, whereas a producing machine may depreciate based mostly on items produced. This method allocates the price of the asset extra precisely over its helpful life than straight-line or declining steadiness strategies, reflecting the precise put on and tear skilled.
Precisely reflecting utilization patterns gives a number of benefits. It improves the matching of income with bills, resulting in extra life like monetary statements. This enhanced accuracy can facilitate higher decision-making concerning asset substitute and capital budgeting. Traditionally, this methodology has been significantly related in industries with excessive asset utilization variability, corresponding to mining, manufacturing, and transportation, the place the normal time-based depreciation strategies proved insufficient for capturing the true price of asset utilization.
