Unit of production method definition
/What is the Unit of Production Method?
The unit of production method is a technique for charging capitalized costs to expense in the oil and gas industry, using the ratio of produced units to reserves. This is done by estimating the total number of units of proved oil or gas reserves and dividing actual production in the period by the beginning proved reserves to derive the amortization rate.
Example of the Unit of Production Method
Cutler Energy has discovered 1,000,000 barrels of proved reserves. Production during the year was 25,000 barrels. Cutler has recorded a cost of $84,000 for the related proved property. The unit of production calculation is:
($84,000 ending book value / 1 million barrels proved reserves) x 25,000 barrels
= $2,100 amortization
When to Revise Unit of Production Rates
Unit of production amortization rates should be revised at least once a year, or whenever the need for a revision is indicated.