Hi,
I would like to understand the cost components involved in calculation of Machine Hour Rate.

Regards,
Karanth

Are you speaking in reference to cost/managerial accounting stuff? Like applying overhead? That's the only machine hour rate I've ever heard of. Since you've put this under other money & services, it's a little difficult to know precisely what you're referring to.

I apologize for not being very clear in my question and category. I am referring to the costing of running a machine, say per hour. This is used in product (produced by that machine) costing. I know the various costs involved like depreciated value of machine, labour (who work on that machine) cost per hour, electricity consumption, cost of land area occupied by that machine, maintenance cost etc. Are these costs all considered in arriving at the machine hour rate or any thing more is there? What is the general practice in costing viz. is depreciated value of the machine considered as fixed expense or is that value also approtioned on hourly basis usage of the machine?

Um... cost accounting issues are not cut and dry. There's much opinion and management choices involved. All of those costs can be considered if you want to apply overhead using machine hours.

A better way to put it is that you have various overhead costs, and applying those costs based on machine hours is only one way to do it. If you only use that one activity base to apply overhead, all overhead costs will go into that, even ones that don't seem to be related to the machine. That's a traditional costing method whereby only one activity base is used to determine a rate and apply overhead.

If you start separating out your different overhead costs and using different activity bases to apply those, then you're into activity-based costing. You might apply some costs based on machine hours, some on labor, some on setups, some on inspections, even some on materials used, etc. All of those things you listed would be good costs to use for machine hours, except maybe the labor, depending on what you mean by "worked on the machine." There could be more stuff -- I doubt anyone would think of everything unless they looked at all the costs incurred. (Although I will add that "land area occupied" which is more like building area occupied could include insurance, taxes, depreciation on the building, all sorts of stuff.)

But... depending on the business and what's going on, you might not want to use one of those costs. It's going to depend on how machine-intensive it is to begin with, and what other things are going on, and what all types of costs you have. Perhaps the area occupied by the machine isn't relevant in some particular situation - simple cause the hours it runs might not be the important thing there.

If you haven't figure it out already, there's no definitive answer to this. But hopefully it's getting the idea across.

As for that fixed cost thing -- fixed costs are most definitely included in your apportionment. Those are the best kind to pro-rate on something cause there isn't any direct way to apply them. The way you're asking the question is like you think it's fixed costs versus including them in the rate. No versus there -- fixed costs are included. They aren't opposite choices.

100 unit of product is produced in a facility. Production of each unit of product need 3 hours ofr labor time and 2.1 hours of machine time. Is the machine fully utilized?

Hi, acummings!

This is the old and now archived thread of someone else. This place also doesn't work the same way that a chat room does. If you would like to post a new question that will get the most exposure, please start a new thread.

This thread is now CLOSED.

Thanks!