The allocation of the cost of natural resources to expense in a rational and systematic manner over the resources to expense in a rational and systematic manner over the resources useful life is called depletion. (That is, depletion is to natural resources as depreciation is to plant assets). Companies generally sue the units-of-activity method (learned earlier in the chapter) to compute depletion. The reason is that depletion generally is a function of 5teh units extracted during the year.
Under the units-of-activity method, companies divide the total cost of the natural resource minus salvage value by the number of units estimated to be in the resource. The result is a depletion cost per unit of product. They then multiply the depletion cost per unit by the number of units extracted and sold. The result is the annual depletion expense.