Machine Hour

Rate

BBA 12/6/2017
 Machine hour rate is a rational method for
absorption of factory overhead. The factory
overhead costs are allocated to a machine or a
group of machines doing the same type of job
and the cost per hour of the machine is
ascertained dividing the total allocated overhead
costs to the machine by number of hours the
machine worked during the same period of time
for which the costs have been considered.
 In this method of overhead absorption each
machine is considered as cost centre.

BBA 12/6/2017
 The machine-hour method is based on the principle
that, in plants where production processes are
primarily mechanical, machines constitute a more
important and costly element than labour. Factory
overhead costs are equitably apportioned to
production on the basis of some rational and
accepted principles. It is the usual practice to find
out the total potential hours for the computation of
machine hours. The cost of idle time may be
calculated separately.
 Alternatively, only effective machine hours may be
ascertained by making allowance for idle time or
setting time. By doing this, the machine hour rate is
inflated by absorbing the machine hour cost for idle
time.

BBA 12/6/2017
The following steps are required for computing the
 machine hour rate :
 Identify the overhead expenses relating to a
specific machine or group of machine in
 order to require for computing machine hour
rate.
 Each machine or group of machine treated as a
cost centre.
 Manufacturing overhead or machine expenses
are grouped into two types :
i) Fixed or Standing Charges
ii) Variable Machine Expenses

BBA 12/6/2017
 i) Fixed or standing charges : Fixed or standing charges
which remain constant irrespective of the use of machine.
For example, rent, insurance charges, rates,
supervision etc.
ii) Variable machine Expenses : These expenses are variable
with use of the machine.
For example, power, depreciation repairs etc.
 An hourly rate of fixed or standing charges will be
calculated by totaling of fixed charges and dividing by the
number of normal hours worked by machine.
 Normal working hours are calculated by adding the cost
relating to non-productive time i.e. normal ideal time for
maintenance and setting up etc.
 Separate hourly rate for each machine expenses will be
calculated.
 The total of the standing charges rate and machine
expenses rates per hour will give the machine hour rate.

BBA 12/6/2017
BBA 12/6/2017