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Machine hour rate
 Machine hour rate:

This method is the most ideal method of absorbing factory overheads

of those production departments in which machinery represents the
predominant factor of the production that is where most of the work is
done through machines.
Estimated factory overheads cost ÷ estimated
machine hour

Further, total overheads related to machine should

be segregated in two ways, normally:

( a ) fixed cost (commonly called standing charges)

and
( b )variable costs(referred to as machine
expenses)
• Cost of machine Rs. 3, 00,000
• Estimated scrap value after the expiry of its useful life (5
years) 50,000
• Rent and rates for the shop per month 2,000
• General lighting for shop per month 1,500
• Insurance premium for the machine per month 4,800
• Repairs and maintenance expenses per month 5,000
• Power consumption – 10 units per hour at Rs.2 per unit
• Estimated working hours per annum2, 200 (including setting-
up time
• of 200 hours: no power is required during setting-up times) 20
• Shop supervisor’s salary per month 6,000
The machine occupies one-fourth of the total area of
the shop. The supervisor is expected to devote
one-fifth of his time for supervising the machine.
Standard charges:

Rent and rates (Rs.2000per month ×12)/4 6,000

General lighting (Rs.1500per month ×12 ) 4,500
Insurance premium per annum 4,800

Shop supervisor’s salary (Rs.6000 ×12)/5 14,400

_______________________
Total standing charges 29,700

Productive working machine-hours (2200-200, 2,000

Setting-up time)
Standing charges per hour (Rs.29, 700/2000hours) Rs.14.85
 Machine expense:

Repairs and maintenance expenses

(Rs.5000/2000hours) 2.5

Depre [(Rs 3 lakh-Rs.0.5 lakh)/5 years] ÷2000hrs 25.0

Power consumption per hour 20.0

Machine-hour rate per hour

47.50

___________

62.35
 advantages

Disadvantages
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