Introduction
Machine hour rate is a method of costing where the cost of running a machine is determined and then spread over the number of hours the machine operates. It helps in calculating the actual cost of production for each product or service.
Calculating Machine Hour Rate
To calculate the machine hour rate, you need to consider the total cost of operating the machine, including depreciation, maintenance, energy consumption, etc. This total cost is then divided by the total number of hours the machine is expected to operate in a specific period.
Importance of Machine Hour Rate
Knowing the machine hour rate is essential for businesses to make informed decisions about pricing, budgeting, and resource allocation. It helps in identifying the cost of production accurately and can improve cost control measures.
Example
Let’s say a company has a machine that costs $50,000 to purchase and has an expected useful life of 5 years. The annual maintenance cost is $5,000, and the machine operates for 2,000 hours per year. The machine hour rate would be calculated as follows:
- Total cost = $50,000 + ($5,000 imes 5) = $75,000
- Machine hour rate = $75,000 / 2,000 = $37.50 per hour
Case Study
In a manufacturing company, the management implemented machine hour rate costing to track the actual cost of production for each product. By analyzing the machine hour rates, they were able to identify inefficiencies in their production process and optimize their resources accordingly. This resulted in a significant increase in profitability for the company.
Conclusion
Machine hour rate is a valuable tool for businesses to calculate the true cost of production and make informed decisions. By understanding and utilizing machine hour rates effectively, companies can improve their cost control measures, increase profitability, and stay competitive in the market.
