Contents
Introduction
Calculation of machine hour rate
Advantages
Disadvantages
Problems
Conclusion
References
Introduction
Machine hour rate is the cost of running a machine per hour. It is one of
the methods of absorbing factory expenses to production. It is used in those industries or
departments where machinery is predominant and there is little or practically no manually
labour. In such industries or departments, overhead consists of indirect expenses in running
and operating the machine. Therefore, it is desirable to allocate overhead to production on the
basis of working hours of the machines. It is not desirable to calculate the machine hour rate
for the entire factory but different rates may be calculated according to their make, type, size,
capacity, wattage, horse power and other factors relating to each machine or group of
machines as a cost centre. Machine hour rate is obtained by dividing the total running
expenses of a machine during a particular period by the number of hours the machine is
estimated to work during that period.
Calculation of machine hour rate:
The information required for calculation of machine hour rate is cost of
the machine; cost of installation of the machine; scarp value; if any; life of the machine in
hours; standing charges like rent etc. Allocated to the machine; repairs and maintenance of
the machine; power consumption; set up time; cost of lubricant applied on the machine and
insurance premium of the machine, if any.
Following steps are required to be taken for the calculation of machine hour rate:
1. Each machine or a group of the machines should be treated as a cost centre so that all
overheads relating to that machine or machines may be identified.
2. Overhead relating to a machine are divided into two parts i.e., fixed or standing charges
and variable or machine expenses. Standing charges are those expenses which remain
constant irrespective of the use or running of machine and examples of such expenses are
rent and rates, lighting and heating, insurance, supervising labour etc.
3. Standing charges are estimated for a period for every machine and amount so estimated
is divided by the total number of normal working hours of the machines during that
period in order to calculate an hourly rate for fixed charges. For machine expenses an
hourly rate is calculated for each item of expenses separately by dividing the expenses by
the normal working hours. While calculating the normal working hours, the hours which
are required for maintenance or for setting- up of or setting- off are to be deducted.
4. Total of standing charges rate and the machine expenses rate will give the ordinary
machine hour rate. If machine operator’s wages are also added into the simple machine
hour rate then it will be called comprehensive machine hour rate.
5. Sometimes supplementary rate is used when the charge for all other overhead cost is not
included in the machine hour rate. It is also used for correcting any error in the
determination of the machine.
Advantages:
It helps to compare the relative efficiencies and the cost of operating different machines. It
brings to light the existence and extent of idle time of machines. It enables the management to
decide how far the use of machine work is preferable to manual work. It is most scientific,
practical and accurate method of calculating manufacturing overheads. Cost reports prepared
with the help of such rate are dependable and can help the management in decision making. It
provides useful data for estimating cost of production, selling standards and for fixing selling
prices for quotations.
Disadvantages:
It involves additional work in assessing the working hours of machines and thus it is a costly
method. It gives inaccurate results if manual labour is equally important. It is difficult to
estimate the machine hours especially when production programme is not available in
advance. Blanket rate cannot be used and it makes the method more costly.
The bases which may be adopted for apportioning the different
expenses for the purpose of calculation of machine hour rate are given below:
S. NO : EXPENSES
STANDING AND OTHER EXPENSES
1 RENT AND TAXES
2 FACTORY LIGHTING & HEATING
3 FACTORY SUPERVISION EXPENSES
4 LABOUR WELFARE EXPENSES
5 INSURANCE
6 LUBRICANTING OIL & CONSUMABLE
7 CLEANING MATERIAL
MACHINE AND VARIABLE EXPENSES
1 DEPRICATION
2 POWER
3 STEAM WATER
4 REPAIR AND MAINTENANCE
Problems:
A machine shop has 8 identical Drilling machines manned by 6 operators. The machines
cannot be worked without an operator wholly engaged on it. The original cost of all these 8
machines works out to Rs. 8 lakhs. These particulars are furnished for a 6 months period:
Normal available hours per month 208
Absenteeism (without pay) hours 18
Leave (with pay) hours 30
Wages for 8 hours Rs.20
Production bonus estimated 15% on wages
Value of power consumed Rs.8050
Supervision and indirect labour Rs.3300
Lighting and electricity Rs.1200
These particulars are for a year:
Repairs and maintenance including consumable 3% on value of machine.
Insurance Rs. 40000
Depreciation 10% on cost
Other sundry works expenses Rs. 12000
General management expenses allocated Rs. 54530
Solution;
Computation of comprehensive machine hour rate of machine shop
Standing charges: For 6 months
Rs. Rs.
General management expenses (Rs. 54530* 6/12) 27265
Sundry works expenses ( Rs. 12000* 6/12) 6000
Depreciation( Rs.80000*10/100*6/12) 40000
Insurance(Rs. 40000*6/12) 20000
Repairs & maintenance(800000*3/100*6/12) 12000
Supervision 3300 108565
Machine expenses
Lighting &electricity 1200
Power consumed 8050
Operator’s wages 17100
Production bonus(15% of 17100) 2565 28915
Machine hour rate= Total overhead of machine shop/ Hours of machine operation
=Rs.137480/5760 hours
= Rs.23.87
Conclusion
In factories or departments, where production is largely by machinery, this method gives
greater accuracy than any of the other methods. In a highly mechanized cost centre, majority
of the overhead expenses are incurred on account of using the machine, such as, depreciation,
power, repairs and maintenance, insurance, etc. Machine hour rate, therefore, provides the
most equitable basis for absorption of overheads in machine intensive cost centres.
References:
1. COST ACCOUNTING-JAIN AND NARANG
2. www.Slideshare.net/yusufswt/machine -hour-rate-method
3. www.Slideshare.net/aarathana/machine-hour-rate
4. www.youarticlelibrary.com/accounting/.../machine-hour-
rate.../52583
THANKYOU
Abstract
Machine hour rate is one of the methods of absorbing factory expenses to production.
Machine hour rate is obtained by dividing the total running expenses of a machine during a
particular period by the number of hours the machine is estimated to work during that period.
Total of the standing charges rate and the machine expenses gives the ordinary machine hour
rate. If machine operator’s wages are also added to ordinary machine hour rate, then it is
called comprehensive machine hour rate. It is very important for those organisations which
are highly mechanized.
