Machine Hour Rate, Functions

Machine Hour Rate (MHR) is the cost per hour of running a machine, used to allocate overhead costs in industries where production heavily depends on machinery. It helps in determining the cost of operating a machine, including expenses like depreciation, maintenance, power, fuel, and operator wages. The formula for MHR is:

Machine Hour Rate = Total Machine Expenses / Total Machine Hours Worked​

This method ensures accurate cost distribution and helps in pricing decisions, cost control, and efficiency analysis. It is widely used in manufacturing industries where machine usage directly influences production costs.

Functions of Machine Hour Rate:

• Accurate Cost Allocation

Machine Hour Rate (MHR) ensures accurate allocation of manufacturing overheads to different jobs or products based on actual machine usage. It distributes costs like depreciation, power, and maintenance proportionately, preventing cost distortions. This method is especially useful in industries with significant machine operations, ensuring fair cost distribution. By linking costs directly to machine operation, businesses can make precise product costing decisions, ultimately leading to better pricing strategies and cost control mechanisms.

• Pricing Decision Support

MHR plays a crucial role in determining product prices by providing a clear breakdown of machine-related expenses. Since accurate cost determination is essential for setting competitive and profitable prices, using MHR ensures that all machine costs are factored into the final price. This helps companies avoid underpricing, which leads to losses, or overpricing, which affects market competitiveness. It enables managers to adjust pricing strategies effectively to maintain profitability while remaining competitive in the industry.

• Efficiency Measurement and Cost Control

By tracking machine costs per hour, businesses can monitor efficiency levels and identify areas for improvement. If the MHR is high, it may indicate inefficiencies such as excessive machine downtime, high maintenance costs, or energy wastage. This analysis helps managers implement corrective measures, such as optimizing maintenance schedules, upgrading machinery, or improving machine utilization rates. A well-monitored MHR system ensures operational efficiency, reducing unnecessary expenses while maximizing productivity.

• Budgeting and Forecasting

MHR aids in budgeting and financial planning by estimating future production costs based on expected machine usage. Companies can use this data to prepare realistic production budgets, set financial targets, and allocate resources effectively. By analyzing historical MHR data, businesses can anticipate cost fluctuations, plan capital expenditures, and manage machine-related expenses proactively. This function helps maintain financial stability by ensuring that machine costs are planned and controlled effectively over time.

• Decision Making on Investments

MHR provides valuable insights into the cost-effectiveness of machinery investments. By comparing the machine hour rates of different machines, businesses can determine whether upgrading or replacing machinery is a cost-effective decision. If a machine has a high MHR due to frequent breakdowns or excessive power consumption, investing in newer, more efficient equipment may be justified. Thus, MHR helps managers make informed capital investment decisions, ensuring better utilization of financial resources and long-term cost savings.

• Job Costing and Profitability Analysis

MHR plays a crucial role in job costing by assigning machine-related expenses to specific jobs, projects, or production runs. This ensures that every job accurately reflects the true cost of machine usage, leading to precise cost estimates and profitability analysis. Businesses can evaluate which jobs are more profitable and which ones require cost optimization. This function is especially beneficial for manufacturing and engineering firms, where machine-intensive operations significantly impact production costs and overall profitability.