Divide the supported depreciable amount by estimated lifetime service units. Multiply that rate by the units used in the reporting period. The linked method example and practice recompute both the unit rate and current expense.
The activity method uses service rather than time as its driver. It can fit a vehicle measured in miles or a machine measured in hours. Expense rises and falls with volume, so the pattern cannot be projected from time alone.
It carries a second estimate the others do not. Total expected output must be estimated at the start and revised when later evidence changes it. The method trades a judgment about time for a judgment about capacity. A reviewer checks both estimates and the usage record. Operational systems usually supply that usage evidence.
Define the unit before using the rate
Choose a service measure that belongs to the asset: machine hours, units produced, miles, or another supported output. Estimate total service capacity on the same basis. Current expense equals current units multiplied by depreciable amount per estimated unit. Reconcile cumulative units and cumulative expense so the asset never falls below supported salvage value.
Under ASC 360-10-35-4, cost allocation must follow a systematic and rational pattern across expected life. The paragraph does not identify a unit for a particular asset. Production logs, meter controls, maintenance evidence, and capacity studies support that choice.
Review the method comparison example and then test the shared inputs in method practice.
Put the concept to work
Understand this concept
- Explain the allocation pattern this method produces and the consumption evidence that would make it the appropriate choice for a given asset.
Analyze this concept
- Predict how this method's early-year and late-year expense compares with the alternatives for the same asset, and what the choice does to reported income and to carrying amount over the life.
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Build on these ideas
- Activity-method depreciation — Understand
To analyze this concept: Required. Comparing patterns requires knowing the pattern.
- Depreciation method — Understand
To understand this concept: Required. A named method is one pattern within the general choice.
- Salvage value — Understand
To analyze this concept: Required. Methods differ in whether salvage bounds the annual charge or the ending amount.
Show 1 more prerequisites
- Useful life — Understand
To understand this concept: Required. Every pattern allocates across a selected life.
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Related concepts
Show 1 more related concepts
Use this idea next
- Activity-method depreciation — Analyze
Required level here: understand. Required. Comparing patterns requires knowing the pattern.