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: