What is the units of activity depreciation?
The units of activity depreciation is one of several methods of depreciation. The units of activity method of depreciation is unique in that a plant asset's useful life is expressed in the total units that are expected to be produced or the asset's total activity during its life. The asset's cost is then allocated to the accounting periods based on the plant asset's usage, units produced, activity, etc. Years and partial years are not relevant when using this depreciation method. (The other methods of depreciation express the plant asset's useful life in years and will allocate the plant asset's cost based on the mere passage of those years. Under these methods partial years are relevant.)
To illustrate the units of activity method of depreciation, let's assume that a company acquires a finishing machine that is expected to perform the finishing operation on a total of 100,000 units of product. The machine has a cost of $225,000 and is expected to have a salvage value of $25,000. Under the units of activity method, the company will record $2 of depreciation whenever it finishes a product. The $2 is computed as follows: ($225,000 - $25,000) divided by the expected 100,000 units of product. In an accounting year when 8,000 units are finished, the depreciation will be $16,000. In a year when 23,000 units are finished, the depreciation will be $46,000. The depreciation will continue until a total of $200,000 of depreciation has been taken (and the book value will be $25,000).
The units of activity method of depreciation is also referred to as the units of production method.