BASICS OF CALCULATION

FOR MACHINE HOUR RATE

PREPARED BY : GOKULKUMAR.K
Training Contents

➢ Define Machine Hour Rate

➢ Inputs & Outputs of MHR

➢ Purpose of Machine Hour Rate

➢ Fixed Costs

➢ Variable Costs

➢ Cost Determining Team Members

➢ How to Calculate MHR

➢ When to review MHR

➢ Why review the Machine Hour Rate?

➢ What is Called Quotation

➢ Basic Input & Output Terminology for Quotation

Define Machine Hour Rate

➢ A machine hour rate is the cost of running a machine for one hour, calculated by dividing the total machine-related overhead
costs by the total number of hours the machine is expected to operate.

➢ This rate helps allocate factory overhead costs to products or jobs based on the machine hours used in their production.

Key reasons /Benefits :

1. Accurate Overhead Allocation.

2. Cost Control.

3. Price Setting.

4. Identifying Idle Time.

5. Improved Decision Making.

6. Cost Comparisons.

7. Facilitates Cost Analysis

Inputs & Outputs of MHR

Machine Details ( Cost, Mfg

Year, Machine Space , Machine Outputs
Power & Etc)

Man Power Cost , Power Cost &

(Tool ,Gauges ,Fixtures ,

Tool Cost

Product MFG Cost)

Inputs

Quotation
Consumables & Auxillary Cost Machine Hour Rate (MHR)

Land & Bulding Cost

Profits & Over Heads

Purpose of Machine Hour Rate

➢ The machine hour rate method is used in manufacturing to allocate overhead costs associated with machines
to specific products or jobs.

➢ It helps determine the true cost of production by accurately assigning the costs of running machines.

➢ It enables businesses to make informed decisions about pricing, profitability, and resource allocation.

Types of Costing in Machine

Hour Rate (MHR)

Fixed Cost Variable Cost

Fixed Costs

➢ Fixed costs remain constant regardless of machine usage (Standing Charges)

Fixed Cost Explanation

1. Basic Machine Cost Machine Purchase Cost

2. Land Cost Rent for Machine / M²

3. Auxillary Cost Oils, Important Reqired Tools

4. Depriciation Cost Machine & Land Depriciation

5. Intrest Machine & Land Intrest

6. Maintenance Cost Machine Maintenance

Variable Costs

➢ variable costs are those that fluctuate directly with the machine's usage (Running Charges/Operating Expenses)

Variable Cost Explanation

1. Power Cost Electricity Cost

2. Consumables Cost Purchasing Gloves, PPE Equipments

3. Salary Cost Operator , Supervioser Salaries

4. Tooling Cost Any Unplaned Spl Tools

Varies due to Operator Manageriacal Salary,

5. OverHead Cost
Power Cost & etc
Varies due to Operator Manageriacal Salary,
6. Profit Cost
Power Cost & etc
Cost Determining Team Members

➢ Engineering Department.

➢ Finance Department.

➢ Production Department & PPC.

➢ VAVE Engineers.

➢ Tool Room Department.

➢ Cost Accountant/Analyst.

➢ Purchase Departments.

➢ Vendor Development & Marketing Department

➢ Top Management
 How to Calculate MHR ( Step By Step Approcach)

How to Calculate MHR : Initial Requirements Value Units

Land Depriciation Year 40 Years
Initial Requirements Value Units
Power Cost / Unit (KWH) ₹ 12.50 Rupees / KWH
Machine Name CNC-01 - [Link] Machines used 5 Machines
Machine Model LL20 T L10 - [Link] Days / Year 300 Days / Year

Machine Make LMW - [Link] Days / Month 25 Days / Month

[Link] Shifts/ Day 2 Shifts/ Days
Year of Purchase 2023 Years
[Link] Hours / Day 10.5 Hours / Day
Basic Machine Cost ₹ 19,00,000.00 Rupees Total Office Space 6000 Feet
Land & Building Cost ₹ 1,20,000.00 Rupees / Month Machine Space 3 M²

Consumables Cost ₹ 37,500.00 Rupees / Month Machine Power 14.75 HP

Operating Efficiency (η) 75.0% %
Operator Salary / Month ₹ 22,500.00 Rupees / Month
Machine Depriciation 10.5% %
[Link] Machines operated by Operator 1 Nos Intrest Value 12% %
Machine Depriciation Year 8 Years Repair & Maintenance 12% %
How to Calculate MHR ( Step By Step Approcach)

a. Calculation (Land Cost) :

Items Value Units

M² = Feet*0.0929 557.4 M²

Rent / Month /M² = ( Land & Building Cost / M²) ₹ 215.29 Rupess / Month /M²

Rent / Day /M² =( Rent / Month /M² / [Link] Days / Month ) ₹ 8.61 Rent / Day /M²

Rent / Hour /M² = (Rent / Day /M² / [Link] Hours / Day) ₹ 0.82 Rent / Hour /M²
 How to Calculate MHR ( Step By Step Approcach)

b. Calculation (Consumables Cost) :

Items Value Units

Cost / Day = ( Consumables Cost / [Link] Days / Month) ₹ 1,500.00 Cost / Day

Cost / Hour = ( Cost / Day / [Link] Hours / Day) ₹ 142.86 Cost / Hour

Cost / Machine = (Cost / Hour / [Link] Machines used) ₹ 28.57 Cost / Machine
 How to Calculate MHR ( Step By Step Approcach)

Step - 3 ( Machine Hour Cost Calculation)

Items Value Units
Age Of Machine = (Current Year - Year of Purchase) 2 Years
Machine Cost as on Year 2025 = (Basic Machine Cost)*(1-Machine
₹ 15,21,947.50 Rupees
Depriciation)^Age of Machine
Intrest Cost = (Machine Cost as on Year 2025 * Intrest Value) ₹ 1,82,633.70 Rupees
Machine Cost = (Machine Cost as on Year 2025 + Intrest Cost) ₹ 17,04,581.20 Rupees

Amortization Year = ( Machine Depriciation Year - Age Of Machine) 6 Years

Machine Hour Cost = Machine Cost /(Amortization Year * [Link] Days /

₹ 90.19 Rupees / Hour
Year * [Link] Hours / Day )
 How to Calculate MHR ( Step By Step Approcach)

Step - 4 ( Consumables Cost / Machine Calculation)

Items Value Units

Consumables Cost / Machine ₹ 28.57 Rupees

Step - 5 ( Land Cost / Machine Calculation)

Items Value Units

Land Cost /Hr = ( Machine Space in M² * Rent / Hour /M²) ₹ 2.46 Rupees

Step - 6 ( Machine Power Cost Calculation)

Items Value Units
Machine Power (KWH) = HP *0.784 11.564 KWH

Power Cost / Hr = (Machine Power (KWH) * η * Power Cost / Unit

₹ 108.41 Rupees
(KWH) )
 How to Calculate MHR ( Step By Step Approcach)

Step - 7 (Repair & Maintenance Cost Calculation)

Items Value Units
Repair & Maintenance Cost = ( Machine Hour Cost * Repair &
₹ 10.82 Rupees
Maintenance %)

Step - 8 (Labour Cost / Machine Calculation)

Items Value Units

Labour Cost / Hour =(Operator Salary / Month /([Link] Days /

₹ 112.50 Rupees
Month*8))/([Link] Machines operated by Operator)
 How to Calculate MHR ( Step By Step Approcach)

Step - 9 (Total MHR Calculation)

Items Value Units

Total MHR = (Machine Hour Cost + Consumables Cost / Machine +

Labour Cost / Machine + Land Cost / Machine + Machine Power Cost ₹ 352.96 Rupees
+ Repair & Maintenance Cost + Labour Cost / Machine )
When to review MHR

➢ Periodically: A regular review schedule, such as annually or semi-annually, is recommended

➢ When Significant Changes Occur: If there's a major change in machine usage, maintenance schedule, or cost of

consumables, the MHR should be reviewed promptly.

➢ After Major Overhauls: If a machine undergoes a significant overhaul or upgrade, the MHR should be recalculated.

➢ When Comparing Cost Structures: If you are comparing your MHR to industry benchmarks or competitor costs, a

review is necessary to ensure accuracy and relevance.

Why review the Machine Hour Rate?

➢ Fluctuating Costs: Machine-related expenses like electricity, maintenance, and repairs can change over time.

➢ Changing Usage: If a machine's operating hours or the way it's used changes, the MHR needs to be adjusted to reflect

these changes.

➢ Accurate Cost Allocation: Regularly reviewing the MHR ensures that overhead costs are allocated to products and

jobs accurately, leading to more precise product costing.

➢ Strategic Decisions: Accurate MHRs are vital for making informed decisions about pricing, production planning, and

machine replacement.
What is Called Quotation

➢ A quotation helps potential customers understand the cost involved before committing to a purchase, allowing
them to compare offers from different manufacturers.

Importance in Manufacturing:

➢ Cost Control: Helping businesses understand and manage their production costs.

➢ Profitability: Ensuring that the final price allows for a reasonable profit margin.

➢ Customer Satisfaction: Providing transparency and allowing customers to make informed decisions.

➢ Production Planning: Enabling businesses to plan their production and resource allocation effectively.
Basic Input & Output Terminology for Quotation

RFQ From Customer

(Customer Drg, Specification or Prepeation of Quotation Prepeation of Quotation
Requirments )

Requirement Criteria in Quotation

1. Raw Material Cost

2. Scrap Recovery Cost
3. Process Selection
4. Machine Selection
5. Cycle Time / Part
6. Process Rejection Cost
7. Packing & Transport Cost
8. Inventory Carrying Cost (ICC)
9. Profit & Over Head Cost

In the Future, We Will Learn about Quotations Preparation

 THANK YOU
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