Question

Please explain the activity method and the limitations of the activity method.

Answer 1

In activity method of depreciation, an assets depreciation is counted as a funtionof total number of units to be produced over its life. Depreciation for each year is counted as:

Number of units produced/Total number of unit over lifetime*(Asset book value-Salvage value)

For hours of activity it can be expressed as:

(Cost - salvage value) × Hours this year
	=	Depreciation charge
Total estimated hours

The limitations of activity method are:
It is not useful when depreciation is a function of time rather than working units or hours of work.
It may not be accurate when deviations of number of units produced each year differ widely as assets also depreciate over time
Sometimes the number of hours worked or units produced can be difficult to asses as large number of units produced need to be tracked.