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.

The information required for calculation of machine hour rate is cost of

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

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

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.