Machine Hour Rate Method of Depreciation

>> August 2, 2013


Machine hour rate is useful for calculating the value of different overheads fastly. Because depreciation is one of main overhead of the business, so, we can use machine hour rate method for calculating the value of depreciation.

As per machine hour rate method of depreciation, we calculate the total life of any fixed asset on the basis of its working hours life. After this, we divide actual cost of fixed assets with life of fixed assets in hours. After dividing, we will obtain the depreciation rate per hour. This method will apply mostly on the machines. So, in following formula, we have used the word machine instead of fixed asset. You can also find any other fixed asset's hourly depreciation rate with following formula by changing the cost of machine, scrap value and estimated life in hours.



Now, we have to see, how many hours our fixed asset worked. By multiplying working hours of fixed assets in year with depreciation rate per hour, we will calculate the amount of annual depreciation.



For Example :

A machine was acquired on 1st April 2004 at a cost of $ 45000, the cost of installation was RS. 5000. It is expected that its total life will be 1,00,000 hours. During 2004 , it worked for  8,000 and during 2005 for 12000 hours. Write up the machinery account for 2004 and 2005.

Hourly Depreciation Rate = Cost of machine + cost of installation / estimated life

HDR= 45000+5000/1,00,000 = Rs.0.50 per hour

Dr.
Machinery Account
Cr.
Date Particular Amount Date Particular Amount
1st April. 2004 Bank Account
(Buying the machine)

Bank Account
(Installation cost)
45000

5000
31st Dec. 2004 Depreciation Account

{8000 hours X Rs. 0.50 per hour}
Balance C/d
4000




46000
50000 50000
1st Jan. 2005 Balance B/D 46000 31st Dec. 2005 Depreciation Account
{12000 hrs X Rs. 0.50 per hour}
6000
31st Dec. 2005 Balance C/d 40000
46000 46000
1st Jan. 2006 Balance B/D 40000      
     







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