Machine hour rate
Where machines dominate production, their costs are charged per running hour instead of through a production overhead rate.
Formulas
- Depreciation = replacement value / useful life
- Imputed interest = purchase cost / 2 × rate
- Space = area × rent per m² × 12
- Rate = fixed costs / running hours + variable costs per hour (power)
Your turn
Three problems on this topic. Amounts with or without thousands separators, a point for pence.
Task
For a machine: replacement value £120,000.00, useful life 10 years (straight line), purchase cost £95,000.00, imputed interest rate 8%, floor space 32 m² at £9.00 per m² per month, maintenance £7,900.00 a year, power 41 kW at £0.25 per kWh. Running time 1,400 hours a year.
Imputed depreciation per year in £
Imputed interest per year in £
Machine hour rate in £ per hour
Amounts like 12,500 or 12500.50; percentages as a number (12.5). Round to the penny or 2 decimal places.
Worked example
For a machine: replacement value £176,000.00, useful life 8 years (straight line), purchase cost £148,000.00, imputed interest rate 8%, floor space 15 m² at £9.00 per m² per month, maintenance £4,300.00 a year, power 15 kW at £0.30 per kWh. Running time 2,000 hours a year.
Worked solution
- 1.Depreciation = £176,000.00 / 8 = £22,000.00 (on replacement value)
- 2.Interest = £148,000.00 / 2 × 8% = £5,920.00 (on half the purchase cost)
- 3.Space = 15 × £9.00 × 12 = £1,620.00; maintenance £4,300.00; fixed total = £33,840.00 → per hour £33,840.00 / 2,000 = £16.92
- 4.Energy per hour = 15 kW × £0.30 = £4.50; machine hour rate = £21.42
Typical mistake: Charging imputed interest on the full instead of half the purchase cost.
Frequently asked questions
Why charge interest on half the purchase cost?
With depreciation, on average only about half of the capital is tied up over the useful life.