How to Calculate Machine Hour Rate

To calculate machine hour rate is so easy and very useful for calculating all overheads without checking each and every detail of different overheads. To know what is its process, we are giving following example :

A machine costing Rs. 10000 is expected to run for 10 years. At the end of this period its scrap value is

likely to be Rs. 900. Repairs during the whole life of the machine are expected to be Rs. 18000 and the

machine is expected to run 4380 hours per year on the average. Its electricity consumption is 15 units per

hour, the rate per unit being 5 paise. The machine occupies one fourth of the area of the department and has

two points out of a total of ten for lighting. The foreman has to devote about one sixth of his time to the

machine. The monthly rent of the department is Rs. 300 and the lighting charges amount to Rs. 80 per

month. The foreman is paid a monthly salary of Rs. 960. Find out the machine hour rate, assuming

insurance is @ 1% p.a. and the expenses on oil, are Rs. 9 per month.

Solution

Ist Step


Fixed expenses per month

After searching, the question, you will find five fixed overheads which I showed in Yellow mark. But just finding fixed cost is not sufficient to calculate machine hour rate because we also have to calculate allocate according some basis which is given below

a) Rent : We take only one fourth total rent because our machine takes only one fourth space

300 X 1/4 = Rs. 75.00

b) Lighting :  We take one fifth of the total lighting because our machine is using only two points out of total ten points of lighting.

80 X 2/10 = 80 X 1/5 = 16

c) Foreman's salary will be one sixth of total salary because he devote only one sixth of his time for machine.

960 X 1/6 = 160

d) Sundry Expenses - oil, waste etc.  9.00

e) Insurance 10000 X 1% X 1/12 = 8.33

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Total Fixed overheads = 268.33
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2nd Step

Calculate Total Hours of Working

because, we calculate total fixed overheads on monthly basis, so we have also working hours of machine on month basis.

Total number of hours machine used in a year = 4350

Total number of hours per month = 365

Fixed expenses per hour = 268 / 365

= 0.735

3rd Step

To Calculate Variable Overhead per hour

a) Depreciation  ( Note : it is not given in question, you calculate it with following formula)

depreciation per hour = cost of machine - scrap / useful life X 1/ total hours of working of machine in a year

= 10000 - 900 / 10 X 1 / 4380 = 0.208

b) Repairs for one hour = 18000 / 4380 X 10 years = 0.411

c) Electricity bill for one hour = 15 units X 0.05 p = 0.750

4th Step

To Calculate Machine Hour

Fixed overhead per hour + Variable overhead per hour = Rs. 2.104 per hour

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