This is also known as productive output method. this method the charge for depreciation in respect of the use of an based on the following factors:
According to asset will be
(i) Total amount paid.
(ii) Total estimated quantities of the output available.
(iii) The actual quantity taken out during the accounting year.
The method is suitable in case of mines, queries, etc., where it is possible to make an estimate of the total output likely to he available. Depreciation is calculated per unit of output The amount of depreciation to be charged in a particular year is computed by multiplying the units of output with the rate of depreciation per unit of output. For example, if a mine is purchased for Rs 20,000 and it is estimated that the total quantity of mineral in the mine in 40,000 tonnes, the rate of depreciation per tonne would amount to 50 paise per tonne (Rs 20,000/4Q000 tonnes). In ease output in a year amounts to 10,000 tonnes, the amount of depreciation to be charged to the Profit and Loss Account would Rs 5,000 (i.e., 10,000 tonnes x Re 0.50).
The method has the advantage of correlating the amount of depreciation with the productive use of the asset. However, it requires making of a reasonably correct estimate of the output likely to be there. In the absenèe of correct estimate, the amount charged by way of depreciation will not be correct.