Machine hour rate is very useful for calculating the value of overheads and all other indirect expenses without knowing the detail of each and every overhead. Only one time, it may be difficult to calculate but after this cost accountant can easy calculate overheads on the basis of machine hour rate of overheads.

Example No. 1. Suppose, machine hour rate overhead is Rs. 5 per hour, and if machine operated 5000 hrs in a year, then we just say the total value of overheads in a year = MHR X Total hrs of Machine Used

Amount of overheads = Rs. 5 X 5000hrs = Rs. 25000

Step 1. To divide all overheads into fixed expenses and variable expenses

It will be very easy to calculate machine hour rate, if cost accountant divide total overheads into fixed overheads and variable overheads. Fixed overheads are those who do not change by changing in output while variable overheads change after changing in output. Main examples of fixed overheads are rent, lighting, salary, insurance and main examples of variable overheads are depreciation, electricity, and repairs.

Step 2. To Calculate Fixed Cost Per Hour

You have to calculate total fixed cost and total number of hours of working of machines. Both have deep relationship because we can calculate Fixed cost per hours on the basis of both.

Fixed cost per hour = Total fixed cost / Total number of hrs of working of machines

Step 3. To Calculate Variable Cost Per Hour

Either you can calculate every variable cost per hour or first calculate total variable cost and then divide it with working hours of machines.

Step 4. To Calculate Machine Hour Rate

Machine hour rate = total overheads / Total machines hours for working

or Fixed overhead or cost per hour + Variable overheads per hour .

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