Question

Give a real world example of where you might apply 'activity-based depreciation'. Why would you choose it over other methods? Provide an explanation of how it works, including how you might record a monthly expense.

Answer 1

Depreciation means reduction in the value of assets (machinery, equipments etc) due to its wear and tear. It increases cost of production.

Activity based depreciation means depreciation of assets due to production or use of machinery, equipment for production process.

The real world examples can be use of machines in the factories where due to production process depreciation occurs. Use of motor vehicles, or any other machines used by us for our daily works can also be included in it.

We choose this method because we can easily understand through it that, with the increase in use of assets due to their depreciation productivity or output from them decreases.

To increase their output or production factories uses machinery every day due to which its value depreciates because of its wear and tear and the production from the machinery decreases as it needs maintenance. Repairing cost occurs.

We can record monthly expenses by calculating the repairing or maintenance cost occurs on the machines due to depreciation.