Mastering Machine Hourly Rates (MHR): The Ultimate Guide for Cost Engineers and Manufacturers

In manufacturing cost calculation, precision isn’t just about machining tolerances—it extends to financial accuracy too. If your machine hourly rate (MHR) isn’t accurate, you could be:

✅ Underpricing jobs, leading to reduced profit margins.
✅ Overpricing quotes, losing out on competitive bids.
✅ Failing to justify machine investments, impacting long-term planning.

This is where the MHR becomes crucial. A well-calculated machine hourly rate helps manufacturers quote jobs accurately, optimize machine utilization, and identify cost-saving opportunities.

Let’s break it down step by step.

Breaking Down the Machine Hourly Rate (MHR)

The MHR consists of fixed and variable costs. Fixed costs are incurred regardless of whether the machine runs, while variable costs fluctuate based on machine usage.

Let’s analyze these two categories in detail.

1. Fixed Costs: Expenses That Exist Regardless of Machine Utilization

1.1 Machine Depreciation (D): Accounting for Wear and Tear

Machines don’t last forever. Depreciation accounts for the gradual loss of value over time due to wear and tear, obsolescence, and technological advancements.

📌 Formula:
Depreciation (D) = (Original Cost - Salvage Value) / Useful Life

📌 Example Calculation:

• Original Cost = ₹16,00,000
• Salvage Value = ₹1,60,000
• Useful Life = 10 years

Depreciation = (16,00,000 - 1,60,000) / 10 = ₹1,44,000 per year

📌 Why It Matters:
Since depreciation directly impacts profitability, it's essential to use proper machine depreciation methods. In India, manufacturers should comply with depreciation rates as specified in the Income Tax Act, 1961 for tax optimization and regulatory compliance.

1.2 Interest on Capital (I): The Cost of Investing in Machinery

Purchasing a CNC machine ties up capital, which could have been used elsewhere for business growth. Interest on capital represents this opportunity cost, even if no loan was taken.

📌 Formula:
Interest on Capital (I) = Average Invested Capital × Interest Rate

📌 Example Calculation:

• Interest Rate = 10%
• Average Invested Capital (AIC) = (16,00,000 + 1,60,000) / 2 = ₹8,80,000
• Interest Cost = 8,80,000 × 10% = ₹88,000 per year

📌 Why It Matters:
A realistic assessment of capital costs helps manufacturers evaluate financing options and plan future investments wisely.

1.3 Occupancy Costs: The Hidden Cost of Space Utilization

Every machine occupies valuable factory space, which incurs costs for rent, utilities, and property maintenance.

📌 Formula:
Occupancy Cost = Space Occupied (sq. m) × Rent per sq. m per month × 12

📌 Example Calculation:

• Machine Space = 15 sq. m
• Rent per sq. m per month = ₹100
• Occupancy Cost = 15 × 100 × 12 = ₹18,000 per year

📌 Why It Matters:
Many manufacturers overlook this manufacturing overhead allocation, which directly impacts profit margins.

2. Variable Costs: Expenses That Depend on Machine Usage

Unlike fixed costs, variable costs increase as the machine runs.

2.1 Electricity Costs (EC): A Major Cost Factor

📌 Formula:
Electricity Cost = Power Consumption (kW) × Electricity Rate (₹ per kWh)

📌 Example Calculation:

• Power Consumption = 8 kW
• Electricity Rate = ₹7 per kWh
• Electricity Cost = 8 × 7 = ₹56 per hour

📌 Why It Matters:
Optimizing energy efficiency is crucial for reducing manufacturing overhead costs.

2.2 Maintenance and Repairs (MR): Extending Machine Life

✔ Includes routine servicing, tool replacements, and repairs.

📌 Example Calculation:

• Annual Maintenance Cost = ₹8,000
• Maintenance Cost Per Hour = ₹50
• Total Maintenance Cost = ₹8,000 + (Machine Hours × ₹50)

📌 Why It Matters:
Following proper maintenance and repair costs tracking reduces unexpected downtime and extends machine life.

2.3 Consumables and Tooling Costs (C)

✔ Includes cutting tools, coolants, lubricants, and wear parts.

📌 Example:
If tooling and coolant costs ₹70 per hour, this should be included in the MHR calculation.

📌 Formula:
Total Variable Costs per Hour = Electricity Cost + Maintenance Cost per Hour + Consumables

Final Machine Hourly Rate (MHR) Calculation

Step 1: Determine Machine Running Time (TRT)

📌 Formula:
Machine Running Time (TRT) = Total Available Time - (Downtime + Maintenance Time)

📌 Example Calculation:

• Total Available Time = 1,500 hours/year
• Downtime = 100 hours
• Maintenance Time = 200 hours

TRT = 1,500 - (100 + 200) = 1,200 hours per year

Step 2: Calculate Machine Hourly Rate (MHR)

📌 Formula:
Machine Hourly Rate (MHR) = (Total Fixed Costs / TRT) + Total Variable Costs per Hour

📌 Example Calculation:

• Total Fixed Costs = ₹2,60,000 per year
• Variable Costs per Hour = ₹220

MHR = (2,60,000 / 1,200) + 220 = ₹492.67 per hour

Conclusion: Mastering MHR for Competitive Advantage

Mastering machine hourly rate (MHR) allows manufacturers to:

✔ Price jobs competitively without underquoting.
✔ Optimize machine utilization for cost savings.
✔ Make informed investment decisions.

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