Machine Hour Rate

The machine hour rate (MHR) is the overhead absorption rate expressed as the cost of running a machine for one hour. In a modern factory where products are made largely by machines rather than by hand, most overhead — depreciation of the machine, power to run it, repairs to keep it going, rent of the space it occupies — is caused by the machine's operation, so the fairest way to charge that overhead to products is per hour of machine running. This makes the machine hour rate the most appropriate absorption method for machine-intensive work.

Definition. The machine hour rate is the overhead cost of operating a machine for one hour, obtained by dividing the total overhead attributable to the machine (or group of machines) for a period by the number of machine hours the machine is expected to run in that period:

Machine hour rate = Total overhead relating to the machine ÷ Machine hours (effective) in the period

Steps in computing a machine hour rate:

1. Treat the machine (or a group of similar machines) as a small cost centre.
2. Gather all the overhead relating to it, splitting it into two kinds:
   • Standing (fixed) charges — overhead that does not depend on how long the machine runs: rent and rates for the space, supervision, insurance, lighting. These are estimated for the period as a whole and then divided by the machine hours to get a rate per hour.
   • Machine (running / variable) expenses — overhead that does depend on running: depreciation, power, repairs and maintenance, consumable stores. Each is expressed as a rate per machine hour.
3. Add the per-hour standing-charge rate and the per-hour machine-expense rates together — the total is the machine hour rate.

Effective machine hours must be used — the hours the machine actually runs on production, after deducting setting-up time, maintenance time and idle time from the gross available hours, unless the question says otherwise. …