The Machine Hour Rate (MHR) is a critical metric in cost accounting used to allocate factory overheads to production. It represents the hourly cost of running a specific machine or group of machines. By determining the MHR, manufacturers can accurately charge overhead costs to products based on the time they spend being processed by a machine.
This method is particularly useful in capital-intensive industries where machinery plays a dominant role in production, as opposed to labor-intensive industries.
How to Calculate Machine Hour Rate
The calculation involves dividing the total overheads related to a machine by the number of machine hours worked. The costs are typically classified into two categories:
Standing Charges (Fixed Costs): These are costs that remain constant regardless of whether the machine is running or not. Examples include rent for the factory floor, insurance, lighting, and supervisor salaries.
Machine Expenses (Variable Costs): These are costs directly incurred when the machine is operating. Examples include depreciation, power/fuel, and repairs/maintenance.
MHR = (Total Standing Charges / Base Hours) + Variable Costs Per Hour
Step-by-Step Formula Breakdown
Calculate Depreciation per Hour: (Cost of Machine - Scrap Value) / Effective Working Life in Hours
Calculate Standing Charges per Hour: Total Annual Standing Charges / Annual Working Hours
Calculate Maintenance per Hour: Annual Maintenance Cost / Annual Working Hours
Add Power/Fuel Cost: Usually measured directly per hour or per unit consumed.
Sum Total: Add all hourly components to get the final Machine Hour Rate.
Why is MHR Important?
Calculating an accurate Machine Hour Rate provides several benefits for a business:
Accurate Product Costing: Ensures that products utilizing expensive machinery absorb their fair share of overheads.
Pricing Strategy: Helps in setting competitive yet profitable selling prices.
Performance Evaluation: allows management to compare the cost-efficiency of different machines.
Decision Making: Assists in decisions regarding machine replacement or outsourcing production.
Example Scenario
Imagine a manufacturing unit buys a CNC machine for $100,000 with a scrap value of $5,000 and a total life of 20,000 hours.
Depreciation: ($100,000 – $5,000) / 20,000 = $4.75 per hour.
Standing Charges: If rent and insurance total $12,000/year and the machine runs 2,000 hours/year, the cost is $6.00 per hour.
Power: The machine consumes $3.00 of electricity per hour.
Maintenance: Annual repairs are $2,000, which is $1.00 per hour ($2,000 / 2,000 hours).
Total Machine Hour Rate = $4.75 + $6.00 + $3.00 + $1.00 = $14.75 per hour.
function calculateMHR() {
// 1. Get Inputs
var machineCost = parseFloat(document.getElementById('machineCost').value);
var scrapValue = parseFloat(document.getElementById('scrapValue').value);
var lifeHours = parseFloat(document.getElementById('lifeHours').value);
var standingCharges = parseFloat(document.getElementById('standingCharges').value);
var annualHours = parseFloat(document.getElementById('annualHours').value);
var annualMaintenance = parseFloat(document.getElementById('annualMaintenance').value);
var hourlyPowerCost = parseFloat(document.getElementById('hourlyPowerCost').value);
// Validation: Check if required inputs are valid numbers
if (isNaN(machineCost) || isNaN(scrapValue) || isNaN(lifeHours) || lifeHours <= 0) {
alert("Please enter valid Machine Valuation details.");
return;
}
if (isNaN(standingCharges) || isNaN(annualHours) || annualHours <= 0) {
alert("Please enter valid Standing Charges and Annual Hours.");
return;
}
if (isNaN(annualMaintenance)) annualMaintenance = 0;
if (isNaN(hourlyPowerCost)) hourlyPowerCost = 0;
// 2. Perform Calculations
// Depreciation Per Hour
// Formula: (Cost – Scrap) / Life Hours
var depreciationTotal = machineCost – scrapValue;
var depreciationPerHour = depreciationTotal / lifeHours;
// Standing Charges Per Hour
// Formula: Annual Standing Charges / Annual Working Hours
var standingPerHour = standingCharges / annualHours;
// Maintenance Per Hour
// Formula: Annual Maintenance / Annual Working Hours
var maintenancePerHour = annualMaintenance / annualHours;
// Total MHR
var totalMHR = depreciationPerHour + standingPerHour + maintenancePerHour + hourlyPowerCost;
// 3. Display Results
var resultBody = document.getElementById('result-body');
resultBody.innerHTML = ''; // Clear previous results
// Helper function to create rows
function createRow(component, logic, value) {
return `
`;
resultBody.innerHTML = rows;
// Show result area
document.getElementById('result-area').style.display = 'block';
// Scroll to results
document.getElementById('result-area').scrollIntoView({ behavior: 'smooth' });
}