What does the activity method in depreciation calculation refer to?

The activity method in depreciation calculation refers to determining depreciation based on asset use. This approach takes into account how much the asset is actually used during a specific period, typically measured in units of production or hours used.

Under this method, the total depreciation expense is directly correlated to the level of activity or usage of the asset, making it a more accurate representation of an asset's wear and tear over time, compared to other methods such as straight-line depreciation which spreads the cost evenly regardless of actual use. The activity method is particularly useful for assets whose value diminishes significantly with usage, such as machinery or vehicles.

Consequently, this method is beneficial for businesses to closely align their financial reporting with the actual financial impact of asset utilization, helping to provide a clearer view of an asset's performance over its useful life.