Machine Hour Rate (MHR)

The Machine Hour Rate refers to the total expense associated with operating a particular machine for one hour. It includes both fixed and variable costs associated with operating the machine. By calculating this rate, factories can accurately determine how much it costs to produce a part or complete a job, especially when machine time is a major part of the process.

Think of it like this: if you were renting a car, you’d want to know how much it costs per hour to use it. Similarly, manufacturers want to know how much it costs per hour to use a machine — whether it’s a CNC, lathe, injection molding machine, or any other equipment.

What you will get from this article

1. In-depth practical knowledge on MHR
2. Explained with Examples
3. Download MHR calculation Excel template
4. Access to our online tool for calculating MHR
5. Knowledge on two types of cost
6. How MHR is used to arrive unit price
7. Other uses of MHR

A Simple Example

Let’s say you own a small machine shop with a milling machine. Over the year, you spend:

• ₹60,000 on depreciation
• ₹24,000 on electricity for that machine
• ₹16,000 on maintenance and oil
• ₹1,00,000 on the operator’s salary (specific to that machine)

In total, that’s ₹2,00,000 spent in a year. And the machine runs for 2,000 hours in that year, the Machine Hour Rate would be:

₹2,00,000 ÷ 2,000 hours = ₹100/hour

That means, every time this machine runs for one hour, it costs you ₹100 — regardless of whether it’s making one piece or ten. Knowing this rate helps you price your products smartly, avoid underquoting, and keep your business sustainable.

Example: How to Calculate Machine Hour Rate for a New Machine

Imagine your company has just installed a new CNC turning center. Since it’s a fresh investment, you don’t yet have actual running data. But you still need to estimate the cost of running it per hour for pricing, planning, and costing purposes.

Let’s walk through a realistic example of how to estimate the Machine Hour Rate (MHR).

Step 1: Basic Machine Information

• Purchase cost of the machine: ₹12,00,000
• Expected useful life: 10 years
• Expected usage per year: 2,000 machine hours

Step 2: Estimate the Annual Costs

1. Depreciation
If the machine is expected to be used for 10 years and has no resale or scrap value at the end of its life:
Annual Depreciation = ₹12,00,000 ÷ 10 = ₹1,20,000

2. Power Consumption
The machine consumes around 6 units (kWh) of electricity per hour.
Electricity rate is ₹10 per unit.
Electricity cost per hour = 6 × ₹10 = ₹60
For 2,000 hours per year = ₹60 × 2,000 = ₹1,20,000

3. Operator Salary
You assign one full-time operator at ₹15,000/month.
Annual salary = ₹15,000 × 12 = ₹1,80,000

4. Maintenance and Consumables
You estimate ₹30,000 annually for regular maintenance, coolant, oil, and other running items.

Step 3: Total Estimated Annual Cost

• Depreciation: ₹1,20,000
• Electricity: ₹1,20,000
• Operator salary: ₹1,80,000
• Maintenance: ₹30,000
• Total annual cost: ₹4,50,000

Step 4: Calculate the Machine Hour Rate

If the machine is expected to run for 2,000 hours per year:

Machine Hour Rate = ₹4,50,000 ÷ 2,000 = ₹225/hour

The estimated Machine Hour Rate for your new CNC turning center is ₹225 per hour. This means that every hour the machine operates, it incurs a cost of ₹225. This figure becomes essential when quoting jobs, comparing alternatives, or evaluating profitability.

Now let’s dive in deep…

Types of Costs in Machine Hour Rate

When calculating the Machine Hour Rate, all relevant expenses are grouped into two main categories:

1. Fixed Costs
2. Variable Costs

Understanding these two categories helps ensure no important cost is overlooked and allows for a more accurate estimation.

1. Fixed Costs

Fixed costs are those that remain constant regardless of how many hours the machine runs. These are incurred simply because the machine exists and is ready to operate, even if it’s idle.

Common Fixed Costs Include:

• Depreciation
  The reduction in the value of the machine over its expected life. Usually calculated annually based on the purchase cost and useful life.
• Insurance
  Premiums paid to cover risks such as fire, theft, or mechanical damage. If the machine is insured separately, the full premium is included; otherwise, allocate the relevant portion.
• Factory Rent and Rates
  If the machine occupies a specific area, a portion of the rent or building charges is allocated based on floor space usage.
• Supervisor Salary (if not directly involved in production)
  If a supervisor oversees multiple machines, their salary is split proportionally.
• Interest on Capital (optional)
  Some businesses include notional interest to reflect the opportunity cost of investing in the machine.

2. Variable Costs

Variable costs change depending on how much the machine is used. The more hours it runs, the higher these costs will be.

Common Variable Costs Include:

• Electricity or Power Consumption
  Calculated based on the machine’s kWh usage and local electricity rates. This becomes a significant expense, particularly for machines that consume a high amount of energy.
• Operator Wages (if directly assigned)
  If an operator is dedicated to the machine, their salary is treated as a variable cost. If the operator works across multiple machines, wages are distributed based on usage time.
• Maintenance and Repairs
  Routine maintenance, servicing, and occasional repairs. For a new machine, these might be low initially, but they should still be estimated.
• Consumables
  Includes items like oil, lubricants, coolant, cutting tools, and other materials needed for running the machine.
• Tool Wear and Replacement
  In machines like CNCs or presses, the cutting tools wear out over time and need replacement. These costs should be factored in per hour if possible.

Detailed Example

A manufacturing company has recently installed a new CNC machine costing ₹10,00,000. Since the machine is expected to be used for 2,000 hours per year, the management wants to determine its Machine Hour Rate to help with accurate job costing and pricing decisions.

To arrive at this rate, the company considers all relevant expenses associated with owning and operating the machine. These include fixed costs like depreciation, insurance, rent allocation, interest on capital, and a portion of supervisor salary. They also account for variable costs such as operator wages, electricity consumption, regular maintenance, consumables like oil and coolant, and tool wear.

All cost elements are calculated on an annual basis and then broken down to arrive at the cost per machine hour.

The company incurs the following estimated annual costs related to this machine:

• Electricity consumption: 5 units per hour at ₹10 per unit
• Depreciation: Its expected that the life of machine is 10 years and scrap value is zero, so depreciation per year is 10,00,000/10 = 1,00,000
• Operator salary: ₹12,000 per month
• Annual maintenance cost: ₹25,000
• Insurance: ₹8,000 per year
• Share of factory rent assigned to the machine: ₹15,000 annually.

Based on this data, the company wants to compute the Machine Hour Rate, showing both cost per year and cost per hour for each cost component.

Particulars	Cost per Year (₹)	Cost per Hour (₹)
Fixed Costs
Depreciation (₹10,00,000 ÷ 10)	1,00,000	50.00
Insurance	8,000	4.00
Allocated Rent (Floor Space)	15,000	7.50
Supervisor Salary (apportioned)	12,000	6.00
Interest on Capital (10% of ₹10,00,000)	1,00,000	50.00
Total Fixed Cost	2,35,000	117.50
Variable Costs
Operator Salary (₹12,000 × 12)	1,44,000	72.00
Electricity (5 units/hr × ₹10 × 2,000 hrs)	1,00,000	50.00
Maintenance	25,000	12.50
Consumables (Coolant, Oil, etc.)	18,000	9.00
Tool Wear and Replacement	20,000	10.00
Total Variable Cost	3,07,000	153.50
Total Cost (Fixed + Variable)	5,42,000	271.00

Calculating Machine Cost per Unit

After determining the machine hour rate, the next logical step is to calculate how much of that cost goes into producing each unit. This helps in understanding the actual cost contribution of the machine for every product you manufacture.

To find the machine cost per unit, you need just two inputs:

• The machine hour rate (₹271/hour in our case)
• The time taken by the machine to produce one unit

The formula is simple. Multiply the machine hour rate by the machine time used for a single unit.

For example, if a product takes 12 minutes of machine time, you first convert that into hours. Twelve minutes is 0.20 hours. Then, you multiply this with the machine hour rate. So, ₹271 × 0.20 gives you ₹54.20. That represents the machine’s operating cost for manufacturing a single unit.

This method can be used for any product, whether it takes just a few minutes or over an hour. Just estimate or measure the machine time per unit, convert it into hours, and apply the machine hour rate.

This way, you get a precise cost figure that reflects actual usage. It helps you avoid underpricing, especially for parts that demand more machining time, and ensures you recover your investment in machinery efficiently.

Other Applications of Machine Hour Rate

Beyond costing a single product, the machine hour rate plays a vital role in various areas of operations and decision-making. Here are some important applications:

• Quoting and Estimating Jobs
  When preparing quotations for new customers or custom orders, knowing the machine hour rate helps estimate machining costs accurately. This prevents underquoting and ensures profitability.
• Cost Control and Benchmarking
  Comparing machine hour rates across different machines or departments helps identify where costs are higher than expected. It can reveal inefficiencies or outdated equipment.
• Make or Buy Decisions
  When deciding whether to manufacture a part in-house or outsource it, the machine hour rate helps determine the in-house cost. This supports better strategic decisions.
• Scheduling and Capacity Planning
  Machine hour rates, when combined with available hours, help in evaluating how profitable it is to prioritize certain jobs over others. This is useful for production planning and maximizing resource utilization.
• Investment Justification
  Before purchasing a new machine, companies estimate its expected machine hour rate. If it’s significantly lower than existing equipment, it may justify capital investment.
• Performance Measurement
  Over time, tracking actual machine costs against the estimated MHR can help assess how effectively the machine is being used. A higher cost per hour than estimated may indicate excess downtime, poor maintenance, or under-utilization.
• Profit Margin Analysis
  By knowing how much machine cost is built into each product, companies can analyze profit margins more accurately and adjust selling prices or batch sizes if needed.

These applications make the machine hour rate a powerful tool—not just for costing, but for improving productivity, decision-making, and long-term business growth.

Conclusion

Understanding the Machine Hour Rate isn’t just about numbers—it’s about making smarter, more confident decisions on your shop floor. Whether you’re pricing a job, evaluating machine efficiency, or planning future investments, knowing your exact cost per hour puts you in control. With the right tools and insights, you’re one step closer to running a more efficient and profitable operation.