 # Activity-Based Method

Scenario: Imagine we run a lemonade stand and bought a lemon squeezer for \$200. Each year as we use the lemon squeezer, it takes on wear-and-tear. After 3 years utilizing the lemon squeezer, it breaks and we sell the salvaged parts for \$20.

The lemon squeezer is estimated to be able to squeeze 18,000 lemons. The actual number of lemons squeezed per year are:

• Year 1: 7,500
• Year 2: 2,500
• Year 3: 5,000

Using the activity-based depreciation method, calculate the annual depreciation on our lemon squeezer.

We can use the following formula to determine the depreciation per unit (lemon squeezed) on our lemonade machine.

Depreciation per Unit = (Original Cost - Residual Value) / (# of Units Expected)

In this scenario, we're given the following values...

Scenario: Imagine we run a lemonade stand and bought a lemon squeezer for \$200. Each year as we use the lemon squeezer, it takes on wear-and-tear. After 3 years utilizing the lemon squeezer, it breaks and we sell the salvaged parts for \$20.

The lemon squeezer is estimated to be able to squeeze 18,000 lemons. The actual number of lemons squeezed per year are:

• Year 1: 7,500
• Year 2: 2,500
• Year 3: 5,000

Using the activity-based depreciation method, calculate the annual depreciation on our lemon squeezer.

...which can be plugged in like so:

Depreciation per Unit = (Original Cost - Residual Value) / (# of Units Expected)
Depreciation per Unit = (\$200 - \$20) / (18,000)

This means that our lemon squeezer depreciates by \$0.01 per lemon squeezed!

Depreciation per Unit = (Original Cost - Residual Value) / (# of Units Expected)
Depreciation per Unit = (\$200 - \$20) / (18,000)
Depreciation per Unit = \$180 / 18,000
Depreciation per Unit = \$0.01

Depreciation per Unit = (Original Cost - Residual Value) / (# of Units Expected)
Depreciation per Unit = (\$200 - \$20) / (18,000)
Depreciation per Unit = \$180 / 18,000
Depreciation per Unit = \$0.01

From here, we can multiply each year's lemon count by \$0.01...

• Year 1: 7,500 x \$0.01 = ???
• Year 2: 2,500 x \$0.01 = ???
• Year 3: 5,000 x \$0.01 = ???

...to compute each year's depreciation expense!

• Year 1: 7,500 x \$0.01 = \$75
• Year 2: 2,500 x \$0.01 = \$25
• Year 3: 5,000 x \$0.01 = \$50
• Year 1: 7,500 x \$0.01 = \$75
• Year 2: 2,500 x \$0.01 = \$25
• Year 3: 5,000 x \$0.01 = \$50