# Units - in the first year Illustration 9A Formula for...

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Units-of-Activity Alternative Terminology Another term often used is the units-of- production method . Under the units-of-activity method, useful life is expressed in terms of the total units of production or use expected from the asset. The units-of-activity method is ideally suited to equipment whose activity can be measured in units of output, miles driven, or hours in use. The units-of-activity method is generally not suitable for assets for which depreciation is a function more of time than of use. To use this method, a company estimates the total units of activity for the entire useful life and divides that amount into the depreciable cost to determine the depreciation cost per unit. It then multiplies the depreciation cost per unit by the units of activity during the year to find the annual depreciation for that year. To illustrate, assume that Bill's Pizzas estimates it will drive its new delivery truck 15,000 miles in the first year. Illustration 9A-3 presents the formula and computation of depreciation expense

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Unformatted text preview: in the first year. Illustration 9A- Formula for units-of-activity method Illustration 9A-4 shows the depreciation schedule, using assumed mileage data. Illustration 9A- Units-of-activity depreciation schedule Helpful Hint Depreciation stops when the asset's book value equals its expected salvage value. The units-of-activity method is not nearly as popular as the straight-line method, primarily because it is often difficult to make a reasonable estimate of total activity. However, this method is used by some very large companies, such as Standard Oil Company of California and Boise Cascade Corporation. When the productivity of the asset varies significantly from one period to another, the units-of-activity method results in the best matching of expenses with revenues. This method is easy to apply when assets are purchased during the year. In such a case, companies use the productivity of the asset for the partial year in computing the depreciation....
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Units - in the first year Illustration 9A Formula for...

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