Machine hour rate
Machine hour rate is an overhead absorption rate that charges factory overhead to products based on machine hours used rather than labour hours. It suits production that is machine-intensive rather than driven mainly by manual labour.
See it move
A factory budgets €180,000 of overhead against 15,000 machine hours, a rate of €12 per hour. Job 84 uses 70 machine hours, so overhead applied is 70 times €12, or €840 — the job's 75 direct labour hours play no part in a machine-hour-based rate.
The formula
Variables
- Machine hour rate (€ per machine hour)
- Budgeted factory overhead (€)
- Budgeted machine hours (hours)
Sets the amount of overhead charged to a job or product for every machine hour it uses.
Check yourself
A factory budgets €140,000 of factory overhead and expects to run its machines for 17,500 hours this month. Job 84 uses 70 machine hours and 75 direct labour hours to complete. Using the machine hour rate, how much overhead should be applied to Job 84?