Under activeness method, the depreciation expense is calculated on the basis of asset'southward actual operational action such as the number of units produced or the number of hours the asset has used during the menses. In other words, this method focuses on the real utilize of the asset in production process rather than only the passage of time. Other names used for activeness method of depreciation arevariable charge approach and units of output method.

Formula:

The following formula is used for calculating depreciation expense under action method of depreciation:

Activity method depreciation formula

Example ane:

The American visitor purchased a wheel loader for $150,000 on January i, 2022. The data regarding usability and life of the loader is given below:

  • Estimated salvage value: $10,000
  • Estimated useful life: 10 years
  • Estimated productive life in hours: 20,000 hours
  • The cycle loader was used for 2,000 hours during the year 2022.

Required: Calculate depreciation expense for the yr 2022 using activity method of depreciation.

Solution:

Depreciation expenses = [($150,000 – $10,000)/twenty,000] × ii,000
= $14,000

The company will record a depreciation expenses of $fourteen,000 for the yr 2022. The wheel loader will be fully depreciated later completing 15,000 hours of work – that is its productive life.

Example 2:

The Southern visitor uses a delivery truck whose cost is $fifty,000 and the salvage value is aught. The truck has been driven 12,500 miles during the yr 2022. The visitor plans to retire the truck later it has been driven 250,000 miles.

Required: Calculate depreciation expense of the Southern company for the year 2022 resulting from the use of delivery truck.

Solution:

Depreciation expenses = ($fifty,000 /250,000) × 12,500
= $2,500

Activity method is splendid in matching expense with revenue in situations where service efficiency of the nugget is decreased by its use. Examples of such assets include vehicles and machines. This method is suitable for companies that desire loftier depreciation during the years of high productivity and low depreciation during the years of low productivity.

Limitations of Activeness method:

Activity method of depreciation suffers from the following limitations:

  1. Its use is not advisable for avails whose depreciation is a function of time instead of activity.
  2. This method uses units of output or hours used which are unremarkably difficult to judge.