What method estimates depreciation based on the number of units produced before property is worn out?

The unit-of-production method is a depreciation calculation that ties the depreciation expense directly to the actual usage or production output of an asset, rather than the passage of time. This method is particularly useful for assets whose wear and tear is directly proportional to their usage, such as machinery or vehicles.

Under this approach, depreciation is calculated based on the number of units produced or hours used in a given period, thus reflecting the asset's consumption more accurately. For example, if a piece of equipment is expected to be productive for a total of 10,000 units over its lifespan, and it produces 2,000 units in a year, the depreciation expense for that year would be calculated proportionally based on that usage.

This method contrasts with other depreciation methods like the straight-line method, which spreads the cost evenly over the life of the asset, regardless of actual use, and the declining balance and sum of the years' digits methods, which are based on time and estimated future benefits rather than real-time functionality and wear.

Thus, the unit-of-production method effectively matches the depreciation expense to the actual production activity of the asset, making it a very logical and often preferred technique in manufacturing and production-heavy industries.