Definition (1):
Units-of-activity is a depreciation method in which useful life is expressed in terms of the total units of production or use expected from an asset, rather than as a time period. The units-of-activity method is ideally suited to factory machinery. Manufacturing companies can measure production in units of output or in machine hours. This method can also be used or such assets as delivery equipment (miles, driven) and airplanes (hours in use).
To use this method, companies estimate the total units of activity for the entire useful life and then divide these units into the depreciable cost. The resulting number represents the depreciation cost per unit. Companies then apply this depreciation cost per unit to the units of activity during the year for determining the annual depreciation expense.
Definition (2):
“The units of activity method of depreciation is unique in that a plant asset's useful life is expressed in the total units that are expected to be produced or the asset's total activity during its life.” Companies then allocate the cost of the asset to the periods of accounting depending on the activity, units produced, usage, etc. of the plant asset. Partial years and years are irrelevant while using this method of depreciation.
The units-of-activity depreciation method is also called the units of production method.