As someone who has spent years analyzing cost structures in manufacturing, I know how crucial it is to allocate overheads accurately. One of the most effective methods I’ve come across is the Machine Hour Rate (MHR). If you’re new to cost accounting or production management, this guide will help you grasp MHR, its calculation, and its real-world applications.
Table of Contents
What Is Machine Hour Rate?
Machine Hour Rate (MHR) is the cost of running a machine for one hour. It includes both fixed and variable costs, helping businesses determine the true expense of production. Unlike labor-based costing, MHR focuses on machine efficiency, making it ideal for capital-intensive industries like automotive, aerospace, and heavy machinery.
Why MHR Matters
I’ve seen companies struggle with inaccurate costing, leading to underpriced products or inflated overheads. MHR solves this by:
- Improving cost allocation – Distributing fixed costs (depreciation, maintenance) fairly.
- Enhancing pricing strategies – Ensuring products aren’t sold at a loss.
- Boosting efficiency – Identifying underutilized machines.
Components of Machine Hour Rate
MHR consists of two main cost categories:
1. Fixed Costs
These don’t change with production volume. They include:
- Depreciation – Loss in machine value over time.
- Insurance – Annual premiums for machine coverage.
- Rent/Floor Space – Cost allocated per machine.
2. Variable Costs
These fluctuate with usage. They include:
- Power Consumption – Electricity used per hour.
- Maintenance & Repairs – Servicing costs.
- Operator Wages – Labor cost tied to machine operation.
Calculating Machine Hour Rate
The formula for MHR is:
\text{Machine Hour Rate (MHR)} = \frac{\text{Total Machine Cost}}{\text{Total Machine Hours}}Step-by-Step Calculation
Let’s break it down with an example.
Given Data:
- Machine Cost: $100,000
- Lifespan: 10 years
- Annual Operating Days: 300
- Daily Working Hours: 8
- Annual Insurance: $1,200
- Annual Maintenance: $3,000
- Power Cost per Hour: $2
- Operator Wage per Hour: $20
Step 1: Calculate Depreciation
\text{Annual Depreciation} = \frac{\text{Machine Cost}}{\text{Lifespan}} = \frac{100,000}{10} = 10,000 \text{ per year}Step 2: Determine Total Fixed Costs
- Depreciation: $10,000
- Insurance: $1,200
- Total Fixed Costs = $11,200
Step 3: Calculate Total Machine Hours
\text{Total Hours} = \text{Days/Year} \times \text{Hours/Day} = 300 \times 8 = 2,400 \text{ hours}Step 4: Compute Fixed Cost per Hour
\text{Fixed Cost/Hour} = \frac{11,200}{2,400} = 4.67Step 5: Add Variable Costs
- Power: $2/hour
- Maintenance: \frac{3,000}{2,400} = 1.25 \text{ per hour}
- Operator Wage: $20/hour
- Total Variable Cost = $23.25/hour
Step 6: Final MHR
\text{MHR} = \text{Fixed Cost/Hour} + \text{Variable Cost/Hour} = 4.67 + 23.25 = 27.92 \text{ per hour}Summary Table
| Cost Type | Calculation | Hourly Cost |
|---|---|---|
| Depreciation | $100,000 / 10 years | $4.17 |
| Insurance | $1,200 / 2,400 hours | $0.50 |
| Maintenance | $3,000 / 2,400 hours | $1.25 |
| Power | Direct cost | $2.00 |
| Operator Wage | Direct cost | $20.00 |
| Total MHR | Sum of all costs | $27.92 |
Advantages of Using MHR
1. Accurate Product Pricing
I’ve worked with manufacturers who priced products based only on material and labor, ignoring machine costs. MHR ensures every product bears a fair share of overhead.
2. Better Cost Control
By tracking MHR, I’ve helped companies identify machines with high maintenance costs, prompting timely replacements.
3. Efficient Resource Allocation
A textile firm I consulted reduced idle time by 15% after implementing MHR-based scheduling.
Limitations of MHR
1. Not Suitable for Labor-Intensive Industries
If production relies more on workers than machines, traditional labor costing may be better.
2. Requires Detailed Record-Keeping
MHR demands precise tracking of machine hours, power usage, and maintenance—something smaller firms may find cumbersome.
Real-World Application: Automotive Manufacturing
Let’s say a car manufacturer operates a CNC machine with the following details:
- Initial Cost: $500,000
- Lifespan: 8 years
- Annual Hours: 2,000
- Variable Costs: $50/hour
MHR Calculation:
\text{Depreciation} = \frac{500,000}{8} = 62,500 \text{ per year}
\text{Fixed Cost/Hour} = \frac{62,500}{2,000} = 31.25
If producing a car component takes 5 hours, the machine cost allocated is:
5 \times 81.25 = 406.25Comparing MHR with Other Costing Methods
| Method | Basis | Best For |
|---|---|---|
| Machine Hour Rate | Machine usage | Capital-intensive sectors |
| Labor Hour Rate | Worker hours | Service industries |
| Activity-Based | Cost drivers | Complex production lines |
Final Thoughts
From my experience, Machine Hour Rate is indispensable in industries where machines drive production. It brings transparency to costing, helps in budgeting, and supports strategic decisions. While it requires meticulous data, the payoff in cost accuracy is worth it.
