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What is Machine Hour Rate?
The Machine Hour Rate (MHR) is a critical accounting metric used to determine the hourly cost of operating a specific machine or a group of machines within a factory or manufacturing setup. It represents the amount of factory overheads incurred for running a machine for exactly one hour.
Calculating the MHR is essential for accurate product costing, especially in highly mechanized industries where machine activity drives the majority of production expenses. By allocating overheads based on machine usage, businesses can determine precise production costs, set competitive prices, and analyze machine efficiency.
Why Use a Machine Hour Rate Calculator?
Manually calculating overhead absorption rates can be complex due to the mix of fixed and variable costs. This calculator automates the process by:
Separating Costs: It clearly distinguishes between standing charges (fixed costs) and running charges (variable costs).
Handling Depreciation: It automatically computes hourly depreciation based on the machine's cost, useful life, and scrap value.
Precision: It ensures that minute costs like power consumption and lubrication are factored into the final rate.
Key Components of Machine Hour Rate
To accurately calculate MHR, expenses are categorized into two main groups:
1. Standing Charges (Fixed Costs)
These are costs that remain constant regardless of whether the machine is running or idle (within a certain range). They are typically incurred over a period (e.g., annually or monthly) and must be converted to an hourly figure.
Rent & Rates: Floor space occupied by the machine.
Insurance: Premiums paid for machinery insurance.
Supervision: Salary of the supervisor attending to the machine.
Lighting & Heating: General factory lighting allocated to the machine's area.
Formula for Hourly Standing Charges = Total Annual Standing Charges ÷ Total Annual Working Hours
2. Running Charges (Variable Costs)
These costs are incurred only when the machine is in operation. They vary directly with the number of hours the machine runs.
Depreciation: The wear and tear of the machine over time.
Power & Fuel: Electricity or fuel consumed per hour.
Repairs & Maintenance: Costs to keep the machine operational.
Consumables: Lubricating oil, coolants, and cotton waste used during operation.
How to Calculate Machine Hour Rate (Formula)
The calculation involves summing up the hourly standing charges and the hourly running charges.
Annual working hours should be the effective hours. Start with the total available hours in a year (e.g., 365 days × 8 hours), then deduct holidays, weekends, and estimated downtime for maintenance and setup. Do not use the theoretical maximum capacity if the machine is not expected to run that long.
What is the difference between Standing and Running charges?
Standing charges are time-based (e.g., rent per month), meaning you pay them even if the machine is off. Running charges are usage-based (e.g., electricity), meaning they stop when the machine stops. Correctly separating these helps in deciding whether to accept orders at marginal cost during low demand.
Should operator wages be included in MHR?
It depends on the costing method. If the operator attends to only one machine, their wages are often treated as "Direct Labor" and charged directly to the job, not included in the MHR. However, if an operator manages multiple machines, their wages are treated as overheads and allocated to the MHR as a standing charge.
Why is depreciation treated as a variable cost here?
While depreciation can be fixed (time-based), in machine hour rate calculations, it is often treated as variable (usage-based) because the machine's value diminishes largely due to wear and tear from operation. This calculator calculates it on an hourly basis derived from the machine's life and annual usage.