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.
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