What is the units-of-activity depreciation?

Definition of Units-of-Activity Depreciation

The units-of-activity depreciation is unique among the common methods of depreciation in that the useful life of the asset being depreciated is not expressed or calculated based on the passage of time (such as years). Instead, the depreciation is expressed and calculated based on the asset's usage.

Under the units-of-activity method of depreciation, the asset's cost (less any salvage value) is allocated to the accounting periods based on the asset's usage (units produced, activity, etc.) during each of the accounting periods. (Hence, the number of years, partial years, passage of time, etc. are not relevant with the units-of-activity method of depreciation.)

Example of Units-of-Activity Depreciation

Assume that a company acquires a robot that is expected to be useful for performing a simple operation on 100,000 units of product. The robot has a cost of $225,000 and is expected to have a salvage value of $25,000 at the end of the 100,000 operations. Under the units-of-activity method, the company will record $2 of depreciation for every robot operation. (Cost of $225,000 - $25,000 of expected salvage value divided by the expected 100,000 operations.) In an accounting year when 8,000 robot operations occur, the depreciation will be $16,000. In a year when 23,000 operations occur, the depreciation will be $46,000. The robot 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.