Under this computation technique, machine hours are used as a foundation for determining operating cost absorption rate. It is the operating cost of the machine for one hour.
This technique is suitable for industries where foremost portion of the production is performed via the machines. It is not enviable to compute machine hour rate of the entire industry since all the machines may not be consistent in every respect.
Hence part rate is computed for each machine or for a set of identical machines. Machine hour rate is resolute by dividing the amount of overheads relating to the machine by the number of effectual machine hours.
About The Computation Technique of Machine Hour Rate
Computation of Machine Hour Rate in dissimilar from all the above mentioned techniques. Under this technique, the machine is treated as a little department or cost center to allocate various expenses to the machines presently as the expenses charged to superior departments.
While computing machine hour rate, the fixed and variable expenses require to be segregated to yield a better effect. Even if the machine is at rest, it does not have any force on the fixed overheads, while it has a significant effect on top of the variable expenses. Owing to these reasons we require to compute Machine Hour Rate in a systematic way.
Some Steps for Computation Technique Of Machine Hour Rate
Step-1: Each machine or group of machines should be handled as a separate cost center.
Step-2: Overheads are categorized into two groups for example standing charges and machine expenses. Standing charges are fixed expenditures which do not vary with the make use of of machine. Instances of standing charges are rent, lighting, rates, insurance, etc.
Machine expenses are changeable expenses which fluctuate with running of machines, for example depreciation, power, maintenance, repairs, etc. Some accountants treat reduction as a standing charge.
Infect reduction can be treated as fixed or variable expenses depending upon the technique pursued for its calculation. On the other hand for all practical purposes we have handled depreciation as a machine cost for computation of machine hour rate.
Step-3: The effectual machine hours of each machine for a specified period need to be calculated as shown under:
Step-4: The standing charges are approximated for a given period (year, month or week) for every machine and the whole sanding charges are divided by the total number of effectual working hours of the machine to turn at the hourly rate of standing charges.
Step-5: The machine expenses of each one machine are treated unconnectedly in order to compute the hourly rate. Every machine cost of a machine is calculated either by portion or by apportionment.
Step-6: The collective of the standing charges per hour and hourly rate of all the human being machine expenses is intended to arrive at the simple Machine Hour Rate. When the machine operator's wages added to the easy machine hour rate, it is well-known as Comprehensive Machine Hour Rate.
Comprehensive M.H.R. = Machine operator's wages + Simple M.H.R.
While computing machine hour rate a number of the overheads may require to be apportion for the desired machine cost center.