Final answer:
Units-of-production depreciation adjusts the depreciation expense based on actual production levels; higher production leads to higher expenses and vice versa. This reflects the matching principle of aligning costs with associated revenues and can impact various industries differently.
Step-by-step explanation:
When using units-of-production depreciation, if the actual output differs from the estimated amount then the depreciation expense for that period will vary accordingly. The main characteristic of units-of-production depreciation is that it aligns depreciation expense with the actual use or production level of the asset. Therefore, if a company produces more units than expected, the depreciation expense will be higher, and if it produces fewer units, the expense will be lower. This method highlights the matching principle, where costs are recognized in the period in which the revenue associated with those costs is earned.
In practice, this could apply to various industries. For example, the costs involved in producing cars might rely heavily on units-of-production depreciation, as the wear and tear on manufacturing equipment is closely related to the number of cars produced. Conversely, a software company's expenses, including depreciation, may not be as directly tied to the number of software units produced.
Considering economic impact, this concept mirrors situations where the real GDP is below potential GDP due to lower production levels, as identified by Keynes during the Depression. Real-world production levels, asset utilization, and economic performance often deviate from theoretical or potential estimates, affecting financial calculations and economic conditions.