# Depreciation Units-of-Activity, Double-Declining-Balance DDB, Sum-of-the-Years-Digits

The Units of Activity Method Calculator simplifies the often intricate process of calculating depreciation for assets whose value diminishes with each unit of production or hours of operation. This depreciation method will rely on the actual usage of assets so it will be more accurate than other methods. A factor is calculated based on the expected number of units for that asset, rather than the class life of the asset as done for Straight Line and Declining Balance methods of depreciation. Units of Activity or Units of Production depreciation method is calculated using units of use for an asset. Those units may be based on mileage, hours, or output specific to that asset. ¨ The declining-balance method produces a
decreasing annual depreciation expense over the useful life of the asset.

• Depreciation is a way to quantify how the value of an asset decreases over time.
• Like the double declining balance method a declining balance depreciation schedule front-loads depreciation of an asset.
• Simply put, it takes into account the value addition life of the asset rather than just time-lapse.
• Note that the estimated salvage value of \$8,000 was not considered in calculating each year’s depreciation expense.
accounts is recorded as a direct decrease (credit) to the asset account.

In many production facilities, businesses have to manage additional costs after an increased volume such as additional labor, supervisors, and energy costs, etc. The Activity-Based Depreciation allows businesses to recover higher costs when the production levels increase after a certain limit. The output level from any asset directly relates to the expenses incurred in production. The profitability levels fluctuate with different levels of the activities too. As with activity-based costing, the depreciation method connects the profitability with asset activities. The yearly profits and costs can be really spread out based on the actual performance and utility of the underlying assets.

## The Formula for the Unit of Production Method Is

Depreciation is the process of allocating a cost to an expense over an asset’s estimated useful life. Many companies use the units of activity method to calculate this amount. The useful life of an asset is the number of units it is expected to produce within a year.

• The double-declining-balance (DDB) method, which is also referred to as the 200%-declining-balance method, is one of the accelerated methods of depreciation.
• Activity-Based Depreciation expense is suitable for the assets which produce countable output.
• The depreciation for the 2nd year will be 9/55 times the asset’s depreciable cost.
• For the second year depreciation, subtract year one’s depreciation from the asset’s original depreciation basis.

Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. You purchase a construction vehicle for your business for \$225,000 and you expect it to have a life of 15,000 hours with a salvage value of \$5,000 after about 10 years. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. Activities Based Depreciation allows the management to match between revenue and depreciation expense. The “sum-of-the-years’-digits” refers to adding the digits in the years of an asset’s useful life. For the following example, we’ll assume our sample asset has yearly depreciation of \$2,000, using Straight-line Depreciation.

It ends when the cost of the unit is fully recovered or the unit has produced all units within its estimated production capacity, whichever comes first. We can calculate the activity method of deprecation by estimating the total output in the lifetime of the asset. And then calculate the cost per unit of output which is simply the purchase price less scrap value and divided by total output.

This method is useful for businesses with varying output levels, as it allows for more accurate cost matching. This method of depreciation is based on the amount of operational activity of an asset, such as the number of hours used or units produced. While the activity method can be a good option for long-lived plant assets, it has certain disadvantages and is not universally applied. In addition, it is not an exact science and may not be appropriate for all industries. Like the double declining balance method a declining balance depreciation schedule front-loads depreciation of an asset.

## AccountingTools

The units of depreciation method is also known as the units of activity method. The MUP depreciation method involves selecting a measure for the asset’s use. In either case, the objective is to determine the correct measure for the asset’s useful life. Choosing the right measure modular home floor plans and designs can be difficult if the asset is used in many different production processes. Using the actual miles, we multiply by the factor to determine depreciation expense. Net Book Value is calculated by taking the cost of the asset and subtracted the accumulated depreciation.

(Cost of \$225,000 – \$25,000 of expected salvage value divided by the expected 100,000 operations.) In an accounting year when 8,000 robot operations occur, the depreciation will be \$16,000. In a year when 23,000 operations occur, the depreciation will be \$46,000. The robot depreciation will continue until a total of \$200,000 of depreciation has been taken (and the book value will be \$25,000). Depreciation expense is an accounting method used to allocate the cost of a long-term asset over its useful life.

## Methods of Depreciation

Businesses often use depreciation to offset the initial cost of acquiring an asset for tax purposes. Rather than fully deduct the cost of an asset in the same year it was purchased, businesses can deduct part of the cost of the asset each year according to a calculated depreciation schedule. At the end of 10 years, the contra asset account Accumulated Depreciation will have a credit balance of \$110,000. When this is combined with the debit balance of \$115,000 in the asset account Fixtures, the book value of the fixtures will be \$5,000 (which is equal to the estimated salvage value). This is due to the fact that output levels can vary significantly from year to year, making it difficult to create an accurate estimate.

## It can be used for long-lived plant assets

The monthly accounting close process for a nonprofit organization involves a series of steps to ensure accurate and up-to-date financial records. ¨ Intangibles do not usually use a contra asset
account like the contra asset account Accumulated Depreciation used for plant