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Machine hour rate

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Booma Thayumanavar
Booma Thayumanavar

The document discusses machine hour rate, which is a method used to allocate factory overhead costs based on machine hours. It defines machine hour rate as the cost of running a machine per hour. The key steps to calculate machine hour rate are: (1) identify machine-related overhead costs, (2) divide total overhead by estimated machine hours to get a rate per hour, (3) rates can vary by machine type. The advantages are it allows for accurate overhead allocation and cost comparisons. Disadvantages include additional work to track machine hours and potential inaccuracies if manual labor is also important. Problems and examples are provided to demonstrate the calculation of machine hour rates.

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SEMINAR ON MACHINE HOUR RATE T.BOOMA 2ND M.COM
CONTENT 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 manual 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 formula used in computing the rate is:  “Machine hour Rate is calculated by dividing the cost to be apportioned or absorbed by the number of hours for which a machine or machines are operated or expected to be operated”  Machine Hour Rate = Total Factory Overheads(budgeted or actual) Total Machine Hours (estimated or actual) EXAMPLE:  If factory overhead is Rs 3, 00,000 and total machine hours are 1,500, the machine hour rate is Rs--------- per machine hour  (Rs 3, 00,000 ÷ 1500 hours-rs.200).
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; scrap 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 lubricants 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 machines should be treated as a cost centre so that all overheads relating to that machine or machines may be identified. 2. Overheads 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.
Cont.. 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 machine 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 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 i.e., only machine expenses are taken for the purpose of machine hour rate. It is also used for correcting any error in the determination of machine
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 OR FIXED CHARGES 1 RENT AND TAXES 2 FACTORY LIGHTING&HEATING 3 FACTORY SUPERVISION EXPENSES 4 LABOUR WELFARE EXPENSES 5 INSURANCE 6 LUBRICATING OIL & CONSUMABLE STORES 7 CLEANING MATERIAL MACHINE OR VARIABLE EXPENSES 1 DEPRECIATION 2 POWER 3 STEAM WATER 4 REPAIRS AND MAINTENANCE
Advantages: It helps to compare the relative efficiencies and 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, setting 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 program is not available in advance. Blanket rate cannot be used and it makes the method more costly.
PROBLEMS: 1. A machine is purchased for cash at rs.9,200. its working life is estimated to be 18,000 hours after which its scrap value is estimated at rs.200. it is assumed from past experience that: The machine will work for 1,800 hours annually. The repair charges will be rs.1,080 during the whole period of life of the machine. The power consumption will be 5 units per hour at 6 paise per unit. Other annual standing charges are estimated to be: Rs. A)Rent of dept. (machine occupies 1/5 of the total space) 780 B)Light(12 points in the dept.-2 points engaged in the machine) 288 C)Foreman‘s salary(1/4 of his time is occupied in the machine) 6000 D)Insurance premium(fire) for machinery 36
CALCULATION OF MACHINE HOUR RATE STANDING CHARGES PER ANNUM PER HOUR Rent (rs.780/rs.5) 156 Light (2/12*rs.288) 48 Insurance charges 36 Cotton waste 60 Foreman‘s salary (rs.6000/4) 1500 Total Standing Charges 1800 Hourly rate of standing charges rs.1800/1800 1.00 MACHINE EXPENSES Depreciation (rs.9200-rs.200/18000) 0.50 Repairs and Maintenance (rs.1080/18000) 0.06 Power (0.06*5) 0.30
2. Compute the machine hour rate so as to cover the overhead expenses given below: per hour: Electric power 70 paise Steam 35 paise Water 10 paise Repairs Rs.680 p.a Rent Rs.350 p.a Other information available were: Original cost of machine Rs.15000 Present book value Rs.3000 Replacement value
STANDING CHARGES PER ANNUM PER HOUR Rent 350 Total standing charges 350 Hourly rate of standing charges rs.350/2400 0.15 MACHINE EXPENSES Electric power 0.70 Steam 0.35 Water 0.10 Repairs (680/2400) 0.28 Depreciation (1500/2400) 0.63 MACHINE HOUR RATE 2.21
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 center, 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 centers
TIME TO ANSWER: 1. Formula For Machine Hour Rate------ 2. Power Is ------------ 3. Interest Of Hire Purchase Is--------- 4. -----Cannot Be Used And It Makes The Method More Costly 5. If Factory Overhead Is Rs 5, 00,000 And Total Machine Hours Are 5,000, The Machine Hour Rate Is Rs ------Per Hour
REFERENCES 1. COST ACCOUNTING-JAIN&NARANG 2. www.slideshare.net/yusufswt/machine- hour-rate-method 3. www.yourarticlelibrary.com/accounting/.../ machine-hours-rate.../52583
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Machine hour rate

  • 1. SEMINAR ON MACHINE HOUR RATE T.BOOMA 2ND M.COM
  • 2. CONTENT Introduction Calculation Of Machine Hour Rate Advantages Disadvantages Problems Conclusion References
  • 3. 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 manual 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.
  • 4. The formula used in computing the rate is:  “Machine hour Rate is calculated by dividing the cost to be apportioned or absorbed by the number of hours for which a machine or machines are operated or expected to be operated”  Machine Hour Rate = Total Factory Overheads(budgeted or actual) Total Machine Hours (estimated or actual) EXAMPLE:  If factory overhead is Rs 3, 00,000 and total machine hours are 1,500, the machine hour rate is Rs--------- per machine hour  (Rs 3, 00,000 ÷ 1500 hours-rs.200).
  • 5. 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; scrap 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 lubricants 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 machines should be treated as a cost centre so that all overheads relating to that machine or machines may be identified. 2. Overheads 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.
  • 6. Cont.. 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 machine 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 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 i.e., only machine expenses are taken for the purpose of machine hour rate. It is also used for correcting any error in the determination of machine
  • 7. 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 OR FIXED CHARGES 1 RENT AND TAXES 2 FACTORY LIGHTING&HEATING 3 FACTORY SUPERVISION EXPENSES 4 LABOUR WELFARE EXPENSES 5 INSURANCE 6 LUBRICATING OIL & CONSUMABLE STORES 7 CLEANING MATERIAL MACHINE OR VARIABLE EXPENSES 1 DEPRECIATION 2 POWER 3 STEAM WATER 4 REPAIRS AND MAINTENANCE
  • 8. Advantages: It helps to compare the relative efficiencies and 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, setting standards and for fixing selling prices for quotations.
  • 9. 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 program is not available in advance. Blanket rate cannot be used and it makes the method more costly.
  • 10. PROBLEMS: 1. A machine is purchased for cash at rs.9,200. its working life is estimated to be 18,000 hours after which its scrap value is estimated at rs.200. it is assumed from past experience that: The machine will work for 1,800 hours annually. The repair charges will be rs.1,080 during the whole period of life of the machine. The power consumption will be 5 units per hour at 6 paise per unit. Other annual standing charges are estimated to be: Rs. A)Rent of dept. (machine occupies 1/5 of the total space) 780 B)Light(12 points in the dept.-2 points engaged in the machine) 288 C)Foreman‘s salary(1/4 of his time is occupied in the machine) 6000 D)Insurance premium(fire) for machinery 36
  • 11. CALCULATION OF MACHINE HOUR RATE STANDING CHARGES PER ANNUM PER HOUR Rent (rs.780/rs.5) 156 Light (2/12*rs.288) 48 Insurance charges 36 Cotton waste 60 Foreman‘s salary (rs.6000/4) 1500 Total Standing Charges 1800 Hourly rate of standing charges rs.1800/1800 1.00 MACHINE EXPENSES Depreciation (rs.9200-rs.200/18000) 0.50 Repairs and Maintenance (rs.1080/18000) 0.06 Power (0.06*5) 0.30
  • 12. 2. Compute the machine hour rate so as to cover the overhead expenses given below: per hour: Electric power 70 paise Steam 35 paise Water 10 paise Repairs Rs.680 p.a Rent Rs.350 p.a Other information available were: Original cost of machine Rs.15000 Present book value Rs.3000 Replacement value
  • 13. STANDING CHARGES PER ANNUM PER HOUR Rent 350 Total standing charges 350 Hourly rate of standing charges rs.350/2400 0.15 MACHINE EXPENSES Electric power 0.70 Steam 0.35 Water 0.10 Repairs (680/2400) 0.28 Depreciation (1500/2400) 0.63 MACHINE HOUR RATE 2.21
  • 14. 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 center, 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 centers
  • 15. TIME TO ANSWER: 1. Formula For Machine Hour Rate------ 2. Power Is ------------ 3. Interest Of Hire Purchase Is--------- 4. -----Cannot Be Used And It Makes The Method More Costly 5. If Factory Overhead Is Rs 5, 00,000 And Total Machine Hours Are 5,000, The Machine Hour Rate Is Rs ------Per Hour
  • 16. REFERENCES 1. COST ACCOUNTING-JAIN&NARANG 2. www.slideshare.net/yusufswt/machine- hour-rate-method 3. www.yourarticlelibrary.com/accounting/.../ machine-hours-rate.../52583
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