Machine hour rate

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

Machine hour rate

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Machine hour rate