1. What is Activity-Based Depreciation?

Activity-based depreciation (also known as units-of-production method) allocates depreciation expense based on actual usage or activity rather than time. This method is particularly useful for assets whose wear and tear is more closely related to usage than to the passage of time.

2. How Does the Calculator Work?

The calculator uses the activity-based depreciation formula:

Where:

• \( Cost \) — Original cost of the asset (USD)
• \( Salvage \) — Estimated salvage value at end of useful life (USD)
• \( Activity \) — Actual activity/usage during the period
• \( Total\ Activity \) — Total estimated activity over asset's useful life

Explanation: This method matches depreciation expense with actual asset usage, providing a more accurate representation of an asset's consumption.

3. Importance of Activity-Based Depreciation

Details: This method is particularly valuable for manufacturing equipment, vehicles, and other assets where usage varies significantly from period to period. It provides a more accurate matching of expenses with revenues generated by the asset.

4. Using the Calculator

Tips: Enter the original cost and estimated salvage value in USD. Input the actual activity for the period and the total estimated activity over the asset's useful life. All values must be positive numbers, and cost should be greater than or equal to salvage value.

5. Frequently Asked Questions (FAQ)

Q1: When should I use activity-based depreciation?
A: Use this method for assets whose wear and tear is directly related to usage rather than time, such as manufacturing equipment, vehicles, or production machinery.

Q2: How do I estimate total activity?
A: Total activity is based on the asset's expected productive capacity over its useful life, such as total units produced, miles driven, or hours operated.

Q3: What are the advantages of this method?
A: It provides a more accurate matching of expenses with revenues, reflects actual asset consumption, and is useful for assets with variable usage patterns.

Q4: Are there limitations to this method?
A: It requires accurate tracking of activity, can be more complex to implement, and may not be suitable for assets whose deterioration is time-based rather than usage-based.

Q5: Can this method be used for tax purposes?
A: While GAAP allows this method, tax regulations may have specific requirements. Consult with a tax professional for compliance with local tax laws.