How is Units of Activity Depreciation calculated?

Units of Activity Depreciation is calculated by taking the cost of the asset minus its estimated salvage value and then dividing that difference by the total number of units the asset is expected to produce or the total activity expected over its useful life. This method ties the depreciation expense directly to the usage and actual output of the asset, making it particularly useful for assets that have a variable level of utilization.

In the correct calculation method, the formula effectively spreads the cost of the asset over its expected productive life, correlating the depreciation with the asset's actual performance, which gives a more accurate reflection of its value over time. This approach is especially beneficial for manufacturing equipment or vehicles where wear and tear can be closely associated with the number of units produced or miles driven.

The other options either misrepresent the relationship between cost, salvage value, and total units or incorrectly arrange these elements in their calculations, leading to inaccurate results when applied to the concept of units of activity depreciation.