Q.A machine was purchased on 1st January, 2020 for Rs. 3,00,000. Estimated life of the machine is 10 years and the value of scrap at the end of useful life of machine is 20,000. Other information available are :
Insurance premium Rs. 4,000 per annum.
Electricity consumption 20 units per hour at Re 0.25 per unit.
Rent per month Rs. 800.
Lighting charges for the whole department Rs. 120 per month. Out of the 20 light points for whole department 5 points are used for the machine.
Repairs and maintenance Rs. 2,000 per annum.
Foreman's salary (1/4 of his time is spent for the machine) Rs. 6,000.
Compute Machine Hour Rate. Estimated number of working hour is 4,000 hours per annum.

Machine hour rate is a method of absorption of overhead.

Overhead accounting moves through stages: collection → allocation → apportionment → re-apportionment → absorption. Absorption means charging the overhead of a cost centre to the cost units passing through it.

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Power is a running charge, not a standing charge — option (a).

In computing a machine hour rate, expenses are split into:

The answer is the machine hour rate.

When production is largely machine-based, machine time is the main cost driver of factory overheads (power, depreciation, repairs). Absorbing overhead on the machine hour rate - overhead cost per machine hour x machine hours used by the job - gives the most accurate charge in such a department, whereas a labour …