Units of Activity Depreciation, Step by Step

Units of Activity Depreciation, Step by Step

Straight-line depreciation spreads an asset's cost evenly over the years. That suits a desk or a shelving unit, but not a delivery van that runs 40,000 miles one year and 15,000 the next, or an oven that works double shifts in December and sits idle in January. For assets that wear out with use rather than with time, the units of activity method (also called units of production) ties each year's depreciation to how much the asset actually worked.

This guide gives the formula, two fully worked schedules, what to do when your usage estimate turns out wrong, and how variable declining balance (the VDB function in Excel and Google Sheets) differs. To compare the time-based methods for the same asset, use the depreciation calculator, which builds straight-line, double-declining balance and sum-of-years'-digits schedules.

The formula

Units of activity depreciation takes two steps:

1. Depreciation per unit = (cost − salvage value) ÷ total estimated units of activity.
2. Depreciation for the period = depreciation per unit × units used in the period.

The "unit" is whatever wears the asset out: miles for a vehicle, machine hours for an oven or a CNC router, copies for a printer, cycles for a press. Pick one measure you can actually record, and keep the log (an odometer reading at year end, or the hour meter on the machine) with your books.

Two rules keep the schedule honest:

• Never depreciate below salvage value. If the asset works longer than you estimated, depreciation stops once book value reaches salvage.
• Cost includes getting the asset ready for use: purchase price, delivery, installation and setup, not just the sticker price.

Worked example 1: a delivery van in miles

A bakery buys a delivery van for $42,000. It expects to sell it for about $6,000 after 150,000 miles.

• Depreciable amount: $42,000 − $6,000 = $36,000.
• Depreciation per mile: $36,000 ÷ 150,000 = $0.24 a mile.

The odometer log over five years gives this schedule:

The total is exactly the $36,000 depreciable amount, and the van ends at its $6,000 salvage value. Compare straight-line: $36,000 ÷ 5 = $7,200 every year. Units of activity books $1,920 more expense in the busy first year and $3,600 less in the quiet last year, so each year's profit carries the cost of the miles that year's deliveries actually used.

If the van were driven 20,000 miles in a sixth year, there would be no further depreciation: book value is already at salvage.

Worked example 2: a commercial oven in machine hours

A café buys a deck oven for $18,500 including installation, expects 20,000 operating hours from it and $500 of scrap value at the end.

• Depreciation per hour: ($18,500 − $500) ÷ 20,000 = $0.90 an hour.
• Year 1, 3,200 hours: 3,200 × $0.90 = $2,880. Book value $15,620.
• Year 2, 4,100 hours (a second shift added): 4,100 × $0.90 = $3,690. Book value $11,930.

For a monthly profit and loss statement, the same rate works on monthly hours: 350 hours in a month is $315 of depreciation for that month.

When your usage estimate changes

Estimates are rarely right. If, after year 2, the bakery expects the van to last 180,000 miles in total instead of 150,000, you do not restate past years. You spread what is left over what is left (a change in estimate is applied going forward):

• Book value after year 2: $22,800. Salvage still $6,000, so $16,800 left to depreciate.
• Miles left: 180,000 − 80,000 already driven = 100,000.
• New rate: $16,800 ÷ 100,000 = $0.168 a mile from year 3 onward.

Year 3 at 30,000 miles is then $5,040 instead of $7,200. Write the new estimate and the reason (a fleet service report, the manufacturer's rating) in your asset register.

Variable declining balance: the other "variable" method

People searching for a variable depreciation calculator often mean variable declining balance (VDB), which is a different idea. It is not based on usage. It applies a declining-balance rate (for example 150% or 200% of the straight-line rate) to the remaining book value each year, and switches to straight-line for the remaining years as soon as straight-line gives the bigger number.

Example: $10,000 cost, $1,000 salvage, 5-year life, 150% declining balance. The straight-line rate is 20%, so the declining-balance rate is 1.5 × 20% = 30%.

The five years add up to $9,000, the full depreciable amount. In a spreadsheet, the year 4 figure is =VDB(10000, 1000, 5, 3, 4, 1.5), which returns 1,215. Leave the last argument (no_switch) out or set it to FALSE to allow the switch to straight-line; set it to TRUE to stay on declining balance.

Doing it in a spreadsheet

Units of activity needs no special function. With cost in B1, salvage in B2 and total estimated units in B3:

1. Rate per unit in B4: =(B1-B2)/B3
2. Units for each year in column B from row 7 down, depreciation in column C: =MIN(B7*$B$4, $B$1-$B$2-SUM(C$6:C6)), which caps the total at the depreciable amount.
3. Book value in column D: =$B$1-SUM(C$7:C7)

Copy rows 7 onward down for as many years as you need.

Book depreciation vs tax depreciation

Units of activity is a book (financial statement) method, and it is a good one for showing true profit per year. For US federal income tax, most business property is depreciated under MACRS instead. IRS Publication 946 allows you to elect to exclude property from MACRS if you depreciate it under a method not based on a term of years, such as the unit-of-production method, and you must make that election by the due date of the return for the year the property is placed in service. Many small businesses keep units of activity in their own books and let their tax preparer handle MACRS, Section 179 or bonus depreciation on the return. If you are unsure which applies, ask before you file, not after.

Which method fits which asset

• Units of activity: vehicles, production equipment, ovens, printers and anything with a meter, where wear follows use and usage swings from year to year.
• Straight-line: furniture, fixtures, leasehold improvements, software, anything that ages with time.
• Declining balance or VDB: technology and equipment that loses most of its value early, regardless of use.

Pricing a purchase? The payback period calculator shows how fast the asset earns back its cost, and the equipment loan calculator shows the financing cost next to the depreciation.

Related: depreciation calculator · how to track business expenses without an accountant · balance sheet template