Overhead Rates Based on Machine-hours Are Calculated as – Cost Calculator

Machine-Hour Overhead Rate Calculator

Total Estimated Manufacturing Overhead ($)

Total Estimated Machine-Hours (Hrs)

Calculated Predetermined Overhead Rate:

function calculateOverheadRate() { var overheadCosts = document.getElementById("totalOverhead").value; var hours = document.getElementById("machineHours").value; var resultDiv = document.getElementById("overheadResult"); var resultValue = document.getElementById("resultValue"); if (overheadCosts === "" || hours === "" || parseFloat(hours) <= 0) { alert("Please enter valid positive numbers. Machine-hours must be greater than zero."); return; } var rate = parseFloat(overheadCosts) / parseFloat(hours); resultValue.innerHTML = "$" + rate.toFixed(2) + " per machine-hour"; resultDiv.style.display = "block"; }

Understanding How Overhead Rates Based on Machine-Hours Are Calculated

In modern manufacturing environments where production is heavily automated, traditional methods of allocating overhead (like direct labor hours) often fail to reflect actual resource consumption. This is why many capital-intensive businesses use overhead rates based on machine-hours to accurately assign indirect costs to products.

The Calculation Formula

The predetermined overhead rate using machine-hours is calculated at the beginning of an accounting period. The formula is straightforward:

Overhead Rate = Total Estimated Manufacturing Overhead Costs / Total Estimated Machine-Hours

Components of the Calculation

Total Estimated Manufacturing Overhead: This includes all indirect costs associated with production, such as factory utilities, equipment depreciation, maintenance, indirect materials, and factory supervisor salaries.
Total Estimated Machine-Hours: This is the total number of hours machinery is expected to operate during the period to fulfill production targets.

Why Use Machine-Hours?

Using machine-hours as an allocation base is most appropriate when manufacturing overhead costs are driven primarily by the operation of machinery rather than manual labor. For example, if a factory uses robotic arms to assemble electronics, the electricity and maintenance costs are directly tied to how long those robots run, not how many people are on the floor.

Practical Example

Let's assume "Precision Parts Inc." estimates their total manufacturing overhead for the upcoming year to be $1,200,000. During the same period, they anticipate their CNC machines will run for a total of 40,000 hours.

Using the formula:

$1,200,000 / 40,000 Hours = $30.00 per machine-hour

This means for every hour a machine works on a specific job, $30 of overhead cost will be assigned to that job's total cost calculation.

Common Challenges

While this method provides better accuracy in automated settings, it requires precise estimation. If the actual machine-hours differ significantly from the estimated hours, the company will end up with underapplied or overapplied overhead, which must be adjusted at the end of the fiscal year.