UNIT 10 MACHINE HOUR RATE

Structure
10.0 Objectives
10.1 Introduction
10.2 Advantages and Limitations
10.3 Basis of Apportionment of Overheads
10.4 Computation of Machine Hour Rate
10.5 Let Us Sum Sup
10.6 Key Words
10.7 Answers to Check Your Progress
10.8 Terminal Questions/Exercises

10.0 OBJECTIVES
After studying this unit, you should be able to:
●● explain the basis of apportionment of overheads to machines;
●● state the advantages and limitations of Machine Hour Rate; and
●● explain the procedure and compute Machine Hour Rate of the given date.

10.1 INTRODUCTION
As we discussed in the previous unit at 9.36, this is one of the methods of
absorption of overheads. This method is similar to direct labour hour method.
But instead of taking labour hours as the base, it take machine hours as the
base. The machine hour rate is ascertained the cost of overheads of running
a machine per one hour. This rate is ascertained by the total overhead costs
of a machine with the total running hours of the machine in a given period.

10.2 ADVANTAGES AND LIMITATIONS

Advantages: Following are the advantages of Machine Hour Rate:
1) Considering the costing view point, this is accurate method of
absorption of overheads.
2) In takes the actual running time of the machine and thus gives accurate
results.
3) Under this method, standing charges (fixed overheads) and variable
overheads are separately calculated, without any difficulty, the cost of
idle time can be ascertained.
4) This method is most suitable for absorption of overheads, where large
scale of the activity of production is carried out by machines.
5) Computation is made fixed costs and variable costs separately which
facilitates cost analysis for cost control and other decisions.

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 Overheads Limitations: The following are the limitations of this method:
1) This method is applicable where cost centres mostly due the production
work on machines. Thus it is not universally applicable.
2) It demands addition staff for the clerical work which involves
additional costs.
3) Accuracy in estimation of machine hours well in advance of production
is a difficult task. Hence, there is a possibility of misleading results.

10.3 BASIS OF APPORTIONMENT OF OVERHEADS

As studies the basis of primary and secondary distribution of overheads to
production and service departments in Unit 8, the following are the basis of
apportionment of different overheads pertaining to machines.
Overheads Basis of Apportionment
Fixed or Standing Charges:
1. Rent, Rates, taxes other building Ratio of floor area occupied by each
expenses of factory machine
2. Insurance Insured value of machine
3. Supervisor/Foreman’s/ Time devoted (actual/estimated) by
Attendant’s salary the supervisors to each machine
4. Lighting No. of light points of machine or
floor area occupied by machine
Variable Charges:
5. Machine repair and maintenance Capital value or machine hours
6. Depreciation Capital value or machine hours or
multiple of both
7. Power/Steam Units consumed by machine per
hour per unit rate per unit
8. Chemicals, Lubricating oil and Machine hours or capital value of
other consumables machine

10.4 COMPUTATION OF MACHINE HOUR RATE

As explained earlier, Machine hour rate is the overhead rate for one hour of
machine worked. The first step in the computation of machine hour rate is the
departmentalisation of overheads. i.e., apportionment of overheads costs
of service departments to production departments. Next, these overheads of
the department are allocated and apportioned as per the basis given at 10.3
to different machines in that department treating each machine or a group
of machines as separate cost centre. Then the total overheads pertaining to
the machine are divided by the effective working hours of the machine to
know the machine hour rate. The time required Absorption of for setting of
the machine and its idle time are deducted from the total working hours of
the Factory Overheads machine so as to get the effective working hours of
the machine.
The overhead concerning a machine are divided into fixed or standing and
variable/running overheads. The total fixed overheads (also called standing
charges) are taken and divided by the machine hours for the period concerned
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 to get the fixed overhead hourly rate. For each variable overhead, per hour Machine Hour Rate
rate is directly computed. The total of fixed and variable hourly rate gives the
machine hour rate. It should be noted that while calculating the machine
hour rate (MHR), one should take all expenses for a particular period (a
year or a month) and the machine hour should also relate to the same period.
The proforma for computation of machine hour rate is given in Figure 10.1.
Figure 10.1: Computation of Machine Hour Rate
Standing charges: Amount Rs. Per hour Rs.
Rent xxx
Lighting xxx
Salary xxx
Insurance xxx
Cotton waste xxx
Total xxx

Total
Hourly rate =
No. of Machinehours
Variable Expenses: xxx
Depreciation xxx
Repairs xxx
ower xxx
Machine hour rate xxx
Look at Illustration 1 to 6 and study how MHR is computed under different
situations.
Illustration 1: Compute the machine hour rate from the following data:
Rs.
Cost of machine 1,00,000
Installation charges 10,000
Scrap value after 15 years 5,000
Rent of the shop per month 200
General-lighting for the shop per month 300
Insurance for the machine p.a. 960
Repairs p.a. 1,000
Power 10 units per hour
Rate of power per 100 units 20
Shop supervisor salary p.m. 600
Estimated working hours p.a. are 1,000
The machine occupies one-fourth of total area of the shop. Supervisor
devotes one-third of his time for this machine.
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 Overheads Solution :
Computation of Machine Hour rate
p.a. per hour
Rs. Rs.
Standing charges:
Rent 200 p.m. × 12 months = Rs. 2,400
Machine occupies 1/4th area
only (2,400 × 1/4) 600
Lighting 300 pm. × 12 months = Rs. 3,600
Machine occupies 1/4th area
(3,600 × 1/4) 900
Insurance 960
Supervisor’s salary
600 × 12 months =Rs. 7,200
He devotes 1/3rd of his time
(7,200 × 1/3) 2,400

Total standing charges p.a. 4,860

Hourly rate 4,860 ÷ 1,000 Hours 4.86

Variable charges:
Depreciation* 7.00
Repairs Rs. 1000 ÷ 1000 hours p.a. 1.00
Power for 100 units = Rs. 20
10 × 20
for 10 unit = 2.00
100
Machinehour rate 14.86
Rs.
*Depreciation Cost of the machines 1,00,000
Add: Installation + 10,000
1,10,000
Less: scrap value – 5,000
1,05,000
1, 05, 000
= == Rs.7, 000 p.a.
15 yrs

Working hours p.a. 1,000

Deprecation per hour = 7,000 ÷ 1,000 = Rs. 7
For More Than One Machine
Illustration 2: A machine shop contains four newly purchased machines
each occupying equal amount 28 space and costing A Rs. 40,000, B Rs.
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 50,000; C Rs. 60,000 and D Rs. 80,000. Machine Hour Rate
Expenses per annum of the Machine shop are:
Rs. Rs.
Rent 20,000 Power A 10,200
Rates 8,500 B 10,000
Light 6,300 C 24,000
Administration 19,000 D 29,000
Running Expenses 40,000
Prepare a machine hour rare for each machine assuming (i) 45 hours in a
week and 50 weeks a year, (ii) 80% and life of machine being 10 years
without any scrap value.
Solution
Working hours : 45 hours in a week and 50 weeks a year with 80% utilization.
80
45 hours × 50 weeks × = 1,800 hours
100
Cost 40, 000
Depreciation =  A = = Rs. 4, 000 p.a.
Life 10

B = 50,000 ÷ 10 Rs. 5,000 p.a.

B = 50,000 ÷ 10 = Rs. 5,000 p.a.
C = 60,000 ÷ 10= Rs. 6,000 p.a.
D = 80,000 ÷ 10 = Rs. 8,000 p.a.
Computation of Machine Hour Rate
A B C D
Rs. Rs. Rs. Rs.
Standing Charges
Running apportioned 5,000 5,000 5,000 5,000
equally (space)
Rates -do- 2,125 2,125 2,125 2,125
Light -do- 1,575 1,575 1,575 1,575
Administration -do- 4,750 4,750 4,750 4,750
Total expenses p.a. 13,450 13,450 13,450 13,450

Running Charges
Depreciation 4,000 5,000 6,000 8,000
Power 10,200 10,000 24,000 29,000
Other running expenses 10,000 10,000 10,000 10,000
(equally)
37,650 38,450 53,450 60,450
Machine hour rate
(Total expenses ÷1,800 hrs) 20.92 21.36 29.69 33.58

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 Overheads Hourly Rate with setting up Time
Illustration 3 : Calculate machine hour rate from the following data:
Total machine hours worked p.a. 4,400
Setting up time 400 hours.
Expenses for the machine p.a.
Rent Rs. 12,000; Lighting Rs. 1,200 : Repairs Rs. 2,400 ; Supervision Rs.
4,800. Two attendants looking after 4 Machines were paid Rs. 120 per
month each.
Power consumed by the machine 10 units per hour @ Rs. 40 per 100 units.
Cost of the Machine Rs. 17,200.
Scrap value Rs. 1,200.
Life period 16,000 hours.
Sundry supplies for the machine shop are Rs. 480 p.m. There are four
identical machines in the machine shop. Supervisor is expected to devote
his time equally for all the machines.
Computation of Machine hour rate
Standing charges p.a. per hour

Rs. Rs.
Rent 12,000
Light 1,200
Supervision 4 identical machines equal
time 1/4th × 4800
1,200
Attendants salary
2 Attendants 120 p.m. × 12 months
= 2880 for four machines
For 1 machine 2880 ÷ 4 =

720
Sundry supplies for the shop
480 p.m. × 12 months = 5,760
for four machines
For one machine 5760 ÷4

1,440
Total 16,560
Hourly rate 16,560 ÷ 4000 4.14

Running charges:

17,200 − 1,200
Depreciation =
16,000 hours (life time) 1.00
Repairs 2,400 ÷ 4,000

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 Power for 100 units – Rs. 40 4.00 Machine Hour Rate

10 × 40
For 10 Units per hour =
100
Machine hour rate 9.74

Effective working hours p.a. = 4,400 hours p.a. – 400 hours set up time =
4,000 hours.
When Annual Working Hours Are Not Given
Illustration 4 : Compute a machine hour rate for the month of January.
Cost of machine Rs. 64,000
Scrap value Rs. 4,000
Effective working hours 10,000
Repairs and maintenance over the life period of Machine Rs. 5,000. Standing
charges allocated this Machine Rs. 1,000 for January. Power consumed by
the Machine at Re. 0.60 per units Rs. 1,200 p.m. The machine consumes 10
units of power per hour.
Solution:
Calculation of annual working hours by taking power as the basis.
For Rs. 0.60 = 1 unit.
For Rs. 1,200 – ?

1, 200
= 2,000 units
0.60

For 10 units of power – time is 1 hour.

For 2,000 = Units of power – Time
2, 000 units
= = 200 hours p.m.
10 units
Computation of machine hour rate
p.m. per hour
Rs. Rs.
Standing charges: 1,000
Hourly rate 1000 ÷ 200 hours 5.00
Variable charges:
64,000 − 4,000 6.00
Depreciation =
10,000
Repairs 5,000 + 10,000) life hours 0.50
Power 10 units @ 0.60 . 6.00

Machine Hour Rate 17.50

Comprehensive Machine Hour Rate : You know that direct wages are
not included in production overhead. Hence, these are not considered
while including the machine hour rate. But, sometimes, the direct wages of
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 Overheads a machine operator are also included while calculating the machine hour
rate. In that case, it is known as ‘comprehensive machine hour rate’. Thus,
overheads and direct wages are absorbed in one single rate in the cost of a
product. In Illustration 4, if the wages of machine operator were Rs. 800
p.m., then direct wages rate per machine hour would be Rs. 4 (800 ÷ 200).
The machine hour rate as per Illustration 6 is Rs. 17.50. The comprehensive
machine hour rate will be Rs. 21.50(17.50 + 4).
Illustration 5 : The following expenses have been incurred in respect of a
work shop having 5 identical machines and occupied equal space:
Particulars Rs.
1) Rent and Rates of workshop (p.a.) 80,000
2) Repairs and Maintenance of 5 machines (p.a.) 10,000
3) Lighting for workshop (p.a.) 15,000
4) Power Charges of 5 machines @ Rs. 2 per unit 1,20,000
5) One Supervisor’s Salary (p.m.) 30,000
6) Two Attendent’s Salary (p.m.) 20,000
7) Annual Interest on hire-purchase for machines 25,000
8) Cotton for cleaning for the workshop (p.a.) 1,000
9) Depreciation on each machine (p.a.) 6,000
10) Direct wages 1,60,000
Each machine consumes 10 units of power per hour. Supervisor and
attendants spent equal time on each machine. Calculate Machine Hour Rate
per machine.
Solution:
Computation of Machine Hour Rate for a Machine
Particulars Per annum Per Hour
(Rs.) (Rs.)
Standing Charges
Rent and Rates: Rs. 80,000÷5 16,000
Lighting : Rs. 15,000÷5 3,000
Supervisor salary (p.m.) Rs. 72,000
30,000×12÷5
Attendants Salary (p.m.) Rs. 48,000
20,000×12÷5
Interest on Hire-purchase of 1,60,000
Machines
Direct Wages (Rs. 25,000÷5) 5,000
Cotton for cleaning (Rs. 1,000÷5) 200
Total Standing Charges (p.a.) 2,04,200
Standing Charges per hour
(Rs. 2,04,200÷1,200 hours) 170.17
Variable Charges:
Depreciation (Rs. 6,000÷1,200 hours)

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 Repairs and Maintenance 5.00 Machine Hour Rate

(Rs. 10,000÷5 machines = Rs. 2,000

Rs. 2,000÷1,200 hours 1.67
Power : per hour consumption 10 20.00
units @ Rs.2
Comprehensive Machine Hour Rate 196.84
Working Notes:
i) Since working hours of a machine is not given in the illustration,
power consumption has been taken into account for calculation of
working hours of a machine.
Total power consumption of machines = Rs. 1,20,000
Unit rate = Rs. 2.00
Total units consumed by 5 machines:
1,20,000÷2 = 60,000 units
Per machine consumption: 60,000 units÷5 = 12,000 units
One Machine consumption is 10 units of power per hour.
Therefore, working hours of a machine per annum = 12,000 units÷10
units (Units consumed a machine p.a.÷ per hour consumption)=
1,200 hours per annum.
2) All expenses are charged equally to 5 machines as they are identical
and occupied equal space.
Illustration 6 :A production department works on an average 170 hours
in a month. There are four machines in the department.The following
information is provided:
Machines
Particulars I (Rs.) II (Rs.) III (Rs.) IV (Rs.)
Interest paid on capital 2,400 9,000 2,100 13,500
(p.a.)
Depreciation (p.a.) 6,600 24,000 3,600 36,000
Repairs (p.a.) 1,200 11,100 900 1,800
Power (p.m.) 3,000 4,000 2,000 2,000
Direct wages (p.m.) 50,000 30,000 60,000 90,000
Lubricating oil (p.m.) 100 200 200 400
Floor area occupied 14% 10% 15% 16%

Monthly charges for rent and taxes for the entire factory are Rs. 75,000.
Foreman salary is Rs. 40,000 p.m. and attendant salary is Rs. 15,000 p.m.
Both spent equal time on 4 machines.
You are required to calculate:
i) Simple Machine Hour Rate
ii) Comprehensive Machine Hour Rate

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 Overheads Solution:
Calculation of Simple and Comprehensive Machine Hour Rates
Machines
Particulars I (Rs.) II (Rs.) III IV (Rs.)
(Rs.)
Standing Charges (p.m.)
Interest on Capital 200 750 175 1125
Rent and Rates 10,500 7,500 11,250 12,000
Supervisor Salary 10,000 10,000 10,000 10,000
Attendant Salary 3,750 3,750 3,750 3,750
Total monthly Standing Charges 24,450 22,000 25,175 26,875
A) Hourly Standing Charges 143.82 129.41 148.09 158.09
(170 hours in a month)
Variable Charges (p.m.)
Depreciation 550 2,000 300 3,000
Repairs 100 925 75 150
Power 3,000 4,000 2,000 2,000
Lubricating Oil 100 200 200 400
Total monthly variable charges 3,750 7,125 2,575 5,550
B) Hourly variable charges 22.06 41.91 15.18 32.65
(170 hours p.m.)
i) Simple Machine hour rate (A + B) 165.88 171.32 163.27 191.55
Add:
Direct wages per hour (Direct 294.12 176.47 352.94 529.41
wages 170 hours)
Comprehensive Machine Hour 460.00 347.79 516.21 720.96
Rate
Check Your Progress A
1) List out the Standing charges and Variable Charges for calculation of
Machine Hour Rate.
2) What is comprehensive Machine Hour Rate?
3) State whether each of the following statements is True or False and
justify your answer.
i) Machine hour rate is the best method of absorption of overheads
under all conditions.
ii) Direct wages of a machine operator are included in
comprehensive machine hour rate.
iii) Machine hour rate is simple and is easy to operate.
iv) Effective machine hours are ascertained by adjusting the setting
up time in the total working hours of a machine.

10.5 LET US SUM UP

Machine Hour Rate is ascertained the cost of overheads of running a machine
per one hour which is termed as simple machine hour rate. When the direct
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 wages of a machine is taken into account it is called comprehensive machine Machine Hour Rate
hour rate.

10.6 KEY WORDS

Comprehensive Machine Hour Rate : Overhead and direct wages absorbed
by the cost units in one single rate.
Machine Hour Rate: The overhead rate for one hour of machine worked.

10.7 ANSWERS TO CHECK YOUR PROGRESS

A) 3. i) True ii) False iii) False iv) True

10.8 TERMINAL QUESTIONS/EXCERCISES

1. What do you mean by Machine Hour Rate and Comprehensive
Machine Hour Rate ?
2. What are the basis of various expenses to be apportioned to a machine.
3. Explain the computation of machine hour rate with the help of an
example.
Exercises
1. Calculate Machine Hour Rate for Machine A.
Consumable Stores 600 for Machine A
Consumable stores 1,000 for Machine B
Repairs 800 for Machine A
Repairs 1,200 for Machine B
Lighting and Heating 360
Rent 1,200
Insurance of Building 4,800
Insurance of Machines 800
Depreciation of Machines 700
Room Service 60
General Charges 90
Additional Information :
Working hours Area Book Value
(Sq. ft) (Rs.)
Machine A 1,000 100 12,000
Machine B 2,500 500 20,000
(Answer: Rs. 2.91)
(Hint: Insurance and depreciation of Machines should be apportioned on
the basis book values of machines and all other expenses on the basis of
floor area covered).

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 Overheads 2) Calculate the machine hour rate to recover the overhead expenses
given below:
Per hour Per annum
Electric Power 75Ps.
Steam 10 Ps.
Water 2 Ps
Repairs Rs. 530
Rent
Rs. 270
Running hours
Rs. 2,000
Original Cost Rs. 12,500
Book Value Rs. 2,870
Replacement value Rs. 11,500
Depreciation 1
7 %
2

(Answer: 1.74)
(Hint: Depreciation to be charged on original cost.)
3) Calculate Machine Hour Rate from the following data:
Rs.
Cost of Machine 1,00,000
Installation Charges 10,000
Estimated scrap value
(after working of 15 years) 5,000
Rent and Rates for shop p.m. 200
Lighting for the shop p.m. 300
Insurance of machine p.a. 960
Repairs p.a. 1,000
Power consumption — 10 units per hour
Rates of power per 100 units 20
Estimated working hours p.a. — 2,200)
(This includes setting up time of 200 hours)
Shop supervisor’s salary p.m. 600
The machine occupies 1/4 of the shop. The, supervisor is expected
to devote 1/5 of his time for supervising the machine.
(Answer: Rs. 7.95)
Note:These questions will help you to understand the unit better. Try to
write answers for them and verify with the content. But do not submit
your answers to the University. These are for your practice only.
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 Machine Hour Rate
SOME USEFUL BOOKS
Arora, M.N. 1988, A Text Book of Cost Accountancy, Vikas Publishing
House Pvt. Ltd., New Delhi. (Chapter 9-12).
Bhar, B.K. 1990. Cost Accounting : Methods and Problems, Academic
Publishers, Calcutta. (Chapter 1-2).
Maheshwari, SN. and S.N. Mittal, 1990. Cost Accounting : Theory and
Problems, Shree Mahavir Book Depot, Delhi. (Chapter 4, 5).
Nigam B.M.L. and G. L. Sharrna, 1990. Theory and Techniques of Cost
Accounting,
Himalaya Publishing House, Bombay, (Chapter 8-10).
Owler, L.W,J. and J.L. Brown, 1984. Wheldon’s Cost Accounting, ELBS,
ondon. (Chapter 7-9).

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