Machine-hour rates

Meaning and scope

Specify the machine cost pool and the hours it covers. FAO permits labour to be included in the rate or calculated separately. FAO, calculation of machine rates, §§3.1–3.2

In the worked example, $60,000 over 2,000 normal occupied hours gives $30/hour for setup before labour. Runtime adds $10/hour in operating costs, for $40/hour. Two setup hours and ten runtime hours cost $460 on the machine. Seven attended labour-hours add $175, giving $635 for 100 good units.

For a simple two-part model:

Machine cost = fixed capacity rate × occupied hours + variable operating rate × runtime

Fixed capacity rate = defined fixed cost pool per period ÷ defined capacity hours per period

This is a modeling structure, not a mandatory accounting formula. An all-inclusive rate is also possible, but the job hours charged must match the activity basis used to construct it. Currency/hour without a cost scope and hour definition is incomplete information.

Define the denominator

Scheduled hours, productive hours and operator paid hours are different quantities. A USDA-hosted forestry study defines scheduled time as the period planned for productive work; productive time is the part spent performing the scheduled function. Productive plus delay time equals scheduled time, and utilisation is productive time divided by scheduled time. Those definitions are useful, but its forestry utilisation assumptions and historical dollar rates are not defaults for CNC machining or another industry. Brinker and colleagues, Machine Rates for Selected Forest Harvesting Machines, revised September 2002, p. 5

For a manufacturing model, explicitly classify:

The table is a suggested recording convention, not a universal definition of productive time. Use the same convention in the denominator and job records. Dividing annual costs by all calendar hours and multiplying only by cutting hours understates recovery unless that combination is deliberately compensated elsewhere.

Build the numerator without duplication

FAO separates ownership costs, operating costs and labour. Ownership can include depreciation, financing/opportunity cost, insurance and taxes; operating costs can include fuel or energy, maintenance and wear items. Economic depreciation is not automatically the tax depreciation charge, and capital-related charges appropriate for an equipment comparison are not automatically inventory costs. Keep the purpose and accounting treatment explicit. FAO, §§3.2–3.5

A useful rate record identifies each included cost, its period and allocation basis. For example, a factory support pool may cover space and shared supervision, while direct tooling, coolant and operators remain separate. Alternatively, those costs may be incorporated into an inclusive rate. Either convention can be modeled; charging the same maintenance, labour or depreciation again as a separate line cannot be justified merely by calling it overhead.

Setup and runtime can have different operating costs. FAO illustrates this general principle with separate standing and travelling portions of a truck cycle: operating expenses do not necessarily accrue uniformly throughout all occupied time. Apply a similar split to another machine only after identifying its actual states and costs. FAO, variable-effort cycles, §3.7

Reconciled worked example

Original illustrative assumptions, not market rates: one machine, one year, USD; a $60,000 annual fixed machine/support pool; 2,000 normal chargeable occupied hours, comprising 200 setup hours and 1,800 runtime hours. Runtime-only energy and consumables cost $10/hour. Operator cost is excluded from the machine pool and charged at $25 per attended labour-hour. Maintenance downtime is outside the 2,000 hours. No material, tooling-specific, selling or tax costs are included.

Fixed capacity rate = $60,000 ÷ 2,000 = $30/occupied hour. Runtime therefore costs $40/machine-hour ($30 fixed + $10 variable), while setup costs $30/machine-hour before labour.

At the assumed annual activity:

An illustrative 100-good-unit lot occupies the machine for two setup hours and ten runtime hours. Assume the operator attends both setup hours and only five of the runtime hours, with no additional scrap or rework:

That is $6.35 per good unit, before excluded costs. Reconciliation by phase gives the same result: setup $60 machine + $50 labour = $110; runtime $400 machine + $125 labour = $525; total $635. Charging $40 for all 12 machine hours would incorrectly add $20 of runtime-only operating costs to setup under these assumptions.

Capacity changes and reporting boundaries

Suppose actual occupied activity is only 1,500 hours: 150 setup and 1,350 runtime hours. The unchanged $30 fixed rate recovers $45,000, leaving $15,000 unabsorbed. With operating costs of $13,500, machine costs incurred are $73,500; assigned machine costs are $58,500, plus the $15,000 gap. This assumes no fixed spending variance. ACCA explains that under/over absorption can arise from expenditure changes, activity changes or both; investigate them separately. ACCA, fixed overhead absorption

Dividing $60,000 by the lower 1,500 hours produces $40/hour as a retrospective fixed burden. That may inform management about utilisation, but it is not automatically a valid inventory allocation. For Australian reporting, AASB 102 paragraph 13 uses normal capacity for fixed production overhead and expenses the unallocated portion caused by low activity. Normal capacity reflects normal circumstances across periods, including planned maintenance; it is not simply nameplate or calendar capacity. AASB 102, December 2021 compilation, paragraph 13

Cost rate versus selling rate

A machine cost rate is not a customer price. Pricing may need other production costs, selling/support costs, commercial risk and profit, alongside market and customer considerations. ACCA cautions that a cost-plus calculation does not ensure customers will buy at the resulting price. ACCA, practical pricing

For arithmetic only, a complete defined cost of $80/hour with a 25% markup yields $100/hour. A 25% margin on selling price instead requires $80 ÷ 0.75 = $106.67/hour before rounding. Neither is a recommended shop rate, and neither calculation fixes an incomplete cost pool.

Maintain hour-meter/state records, output, supplied consumables and operator time separately. FAO's daily/weekly reporting approach records machine hours and additional operator hours independently and reconciles cost with output. Updating local costs and measured utilisation is more useful than copying an old equipment table's hourly total. FAO, Appendix A: machine cost and work records

Related references

• Actual costing
• Setup amortization