Final answer:
To compute the units of activity depreciation expense, use the formula (Cost - Salvage Value) / Total Estimated Units of Activity × Units of Activity for the Period. This method factors in the total activity and usage of the asset to calculate the annual depreciation expense.
Step-by-step explanation:
To find the units of activity depreciation expense, you'll need to use the units of activity method, which is a form of calculating depreciation based on the usage of the asset rather than the passage of time. To begin, you must know the total estimated number of units the asset can produce over its lifespan (total activity), its initial cost, its estimated salvage value at the end of its useful life, and the number of units produced in the given accounting period. The following formula encapsulates this approach:
Depreciation Expense = (Cost - Salvage Value) / Total Estimated Units of Activity) × Units of Activity during the Period
For example, if a machine costing $50,000 with a salvage value of $5,000 is expected to produce 500,000 units in its lifetime and produces 50,000 units in a year, then the annual depreciation expense would be calculated as follows:
Depreciation Expense = ($50,000 - $5,000) / 500,000 units × 50,000 units = $4,500
The result, $4,500, represents the depreciation expense for that year based on the actual usage of the asset.