Cost Accounting - Determination of Machine Hour Rate

 

Cost Accounting

Determination of

Machine Hour Rate

Part A: Discussion of basic theories including the definition of Machine Hour Rate and the methods of computing the Machine Hour Rate for absorption of factory overheads.

Part B: Six Illustrations with solutions

Part A

What is Machine Hour Rate?

In the days of mechanisation of production processes, the most relevant factory overhead absorption rate (also called ‘recovery rate’ and ‘application rate’) to be applied is the machine hour rate. This is the rate calculated by dividing the actual or budgeted overhead cost related to a machine or a group of machines by the appropriate number of machine hours worked or estimated. When budgeted hours are used they are taken at average capacity at which a factory normally operates. You cannot take full capacity hours as the factory may not operate at that level and then the absorption rate may be unnecessarily fixed at a lower level. The overhead costs in a highly mechanised factory are mostly related to the number of hours a machine runs. Hence this is supposed to be the best method for absorbing overhead costs into the cost unit. If a machine normally runs for 2,000 hours per annum and overheads to be absorbed are Rs 50,000 per annum, the machine hour rate will be calculated as (50,000/2,000) i.e. Rs 25 per machine hour. If a job takes 50 hours on that machine, then Rs 1,250 (Rs 25 × 50 hrs) will have to be loaded as cost of using the machine for that job.

 

Computation of Machine Hour Rate

A machine hour rate may be calculated using only those overheads which are directly related to the machine e.g. power, fuel, repairs, maintenance, depreciation etc. These expenses for a period are totalled and then divided by the number of hours worked during the same period (on actual or estimate basis) to compute the required machine hour rate. This is called as Ordinary Machine Hour Rate. Whereas, if costs not related to machine are also included (e.g. supervision, rent, lighting, heating etc.) for the rate calculation, such rate is called as Composite Machine Hour Rate. While calculating machine hour rate, the wages paid to machine operators may also be added to the total costs. This is because these operators directly wok on the machines & thus related to machine operation. In such cases the machine hour rate calculated is called Comprehensive Machine Hour Rate. At times a factory may have more than one similar machines simultaneously working. In such case, a Group Machine Hour Rate may be calculated.

 

Overhead rates are usually calculated for each of the production departments. But sometimes a single overhead rate is also calculated for the entire factory which is known as Blanket Overhead Rate.

Part B

Cost Accounting

Determination of Machine Hour Rate (MHR)

(For Recovery of Factory Overheads)

Selected Problems

Illustration: 1

In a machine department of a factory there are five identical machines. From the particulars given below prepare the machine hour rate for one of the machines.

Space of the department	10,000 Sq. Mt.
Space occupied by the machine	2,000 Sq. Mt.
Cost of the machine	Rs 20,000
Scrap value of the machine	Rs 300
Estimated life of the machine	13 years
Rate of depreciation	7½ % p.a.
Normal running of the machine	2,000 hours p.a.
Power consumed by the machine	Rs 3,000 p.a.

 

Estimated repairs and maintenance throughout the working life of the machine is Rs 5,200. Sundry supplies including oil, waste etc. charged direct to the machine amount to Rs 600 p.a.

 

Other expenses of the department p.a. are:

Rent and Rates	Rs 9,000
Lighting	Rs 400
Supervision	Rs 1,250
Other charges	Rs 5,000

 

It is ascertained that the degree of supervision devoted to this machine is 2/5^th remaining 3/5^th being devoted to other machines. There are 16 workers in the department of whom 4 are attached to this machine and the remaining to the other machines. Lighting is to be apportioned according to the number of workers employed.

 

Click here for Solution: 1 in PDF

Illustration: 2

From the following particulars compute the Machine hour rate for a machine.

a.            Cost of each machine is Rs 24,000.

b.            Scrap value of each machine is Rs 4,000.

c.            Estimated Working life of each machine is 40,000 hours.

d.           Estimated cost of repairs and maintenance of each machine during the whole life of the machine is Rs 2,000.

e.            Standing charges of the shop for 4 weekly periods are Rs 3,000.

f.                Working hours in 4 weekly periods are 100 hours.

g.            Number of machines in the shop (each of which is liable for equal charge) is 30.

h.            Number of units of power used for each machine per hour is 4 @ 10p per unit.

 

Click here for Solution: 2 in PDF

Illustration: 3

The following particulars relate to a processing machine treating a typical material. You are required to calculate the machine hour rate.

The cost of the machine	Rs 10,000
Estimated life of the machine	10 years
Scrap value of the machine	Rs 1,000
Working hours per annum (i.e. working hours in 50 weeks @ 44 hours per week)	2,200 hours
Maintenance hours per annum	200 hours
Setting up time per annum (in terms of %-age of total productive time)	5%
Consumption of electricity per hour	16 units
Electricity charge per unit	10 paise
Chemicals required per week	Rs 20
Maintenance cost per year	Rs 1,200

 

Two attendants control the operations of the machine together with 6 other machines. Their combined weekly wages are Rs 140. Departmental overhead allocated to this machine is Rs 2,000 per annum.

 

Click here for Solution: 3 in PDF

Illustration: 4

In a factory there are 5 machines. You are required to calculate the Machine Hour Rate of one particular machine from the following data.

Space of the departments	8,000 Sq. ft.
Cost of each machine	Rs 20,000
Space occupied by each machine	1,600 Sq. ft.
Other relevant information p.a.:
Power consumed by each machine	Rs 3,000
Rate of depreciation	7 ½ %
Number of working hours	2,000 hrs
Estimated Repairs for each machine	Rs 520
Rent & Rates of the departments	Rs 9,000
Lighting of the departments	Rs 750
Supervision of the departments	Rs 1,500
Other charges of the departments	Rs 4,000

 

2/5^th of the supervision is for this machine. There are three mechanics for the departments drawing Rs 50, Rs 60 and Rs 70 p. m. respectively.

 

Click here for Solution: 4 in PDF

Illustration: 5

You are required to calculate the machine hour rate of a machine from the following particulars.

The cost of the machine	Rs 10,000
Estimated life of the machine	10 years
Scrap value of the machine	Rs 1,000
Working hours per annum (i.e. working hours in 50 weeks @ 40 hours per week)	2,000 hours
Maintenance cost per year	Rs 1,200
Consumption of electricity per hour	16 units
Electricity charge per unit	10 paise
Chemicals required per week	Rs 20

 

Two attendants control the operations of the machine together with 5 other machines. Their combined weekly wages are Rs 120. Departmental and General overhead allocated to this machine are Rs 2,000 per annum.

 

Click here for Solution: 5 in PDF

Illustration: 6

An engineering company having 25 different types of automatic machines furnishes you the following data for 2021-22 in respect of machine B:

1.

Cost of the machine	Rs 50,000
Life of the machine	10 years
Scrap value of the machine	Nil

 

2. Overhead expenses are:

Factory Rent	Rs 50,000
Heating and Lighting	Rs 40,000
Supervision	Rs 1,50,000
Reserve equipment of machine B	Rs 5,000

 

Area of the factory is 80,000 sq. ft.

Area occupied by machine B 3,000 sq. ft.

 

3.  Wages of operator is Rs 24 per day of 8 hours including all fringe benefits. He attends to one machine when it is under set up and two machines while under operation.

 

4.  Estimated production hours 3,600 p.a.

Estimated set up time in hours 400 p.a.

Power Rs 0.5 per hour (while the machine is in operation)

 

Prepare a schedule of comprehensive machine hour rate and find the cost of the following jobs:

 

	JOB 1102	JOB 1308
Set up time (Hrs.)	80	40
Operation time (Hrs.)	130	160

 

Click here for Solution: 6 in PDF