Machine hour reate
- 1. Machine hour rate • MEANING: - Machine hour rate (MHR) is the cost of running a machine for one hour. Under this method machines hours are used as the basis for production overhead absorption rate. The rate is calculated as follows: MHR = Production Overheads Machine Hours Example:-Factory overheads ₹ 12,000, machine Hours Rate 1,000. A Job No. 101 requires 100 machines hours. • MHR = Production Overheads =12,000 = ₹ 12 Machine Hours 1,000 OH absorbed by Job No. 101: 100 x 12 = ₹ 1,200
- 2. STEPS FOR CALCULATION OF MACHINE HOUR RATE • Each machine or group of machine should be treated as a cost centre. • The estimated overhead expenses for the period should be determined for each machine or group of machines. • Overheads relating to a machine are divided into two parts i.e. fixed or standing charges and variable or machine expenses. • Standing charges are estimated for a period for every machine and the amount so estimated is divided by the total number of normal working hours of the machine during that period in order to calculate an hourly rate for fixed charges. For machine expenses, an hourly rate is calculated for each item of expenses separately by dividing the expenses by the normal working hours. • Total of standing charges and machine expenses rates will give the ordinary machine hour rate. Methods Absorbing production overheads Machine hour rate
- 3. Advantages:- 1. It takes into account time factor. 2. It is suitable when major portion of production is performed by machines. 3. It facilities the ascertainment of accurate and reliable costs. 4. The under –absorption of overheads would indicate the idle capacity of machines. Disadvantages:- 1. It is not suitable where major part of production done by manual labour. 2. It requires the detailed record of machines for each or operation. 3. It is difficult to understand and calculate. 4. It is quite difficult to estimated machine hours in advance. Methods Absorbing production overheads Machine hour rate
- 4. Apportion Standing (Fixed) charges as shown below Machine hour rate No. Standing Charges Basis Of Apportionment 1 Rent &Rates Floor Area Occupied 2 Heating And Lighting No. Of Lights Points Or Floor AreaOccupied 3 Supervision Time Devoted By The Supervision 4 Insurance Insured Value Of Each Machine 5 Lubricating Oil &Consumable Stores Machine Hours 6 Cleaning Materials No. Of Machines 7 Miscellaneous Expenses Equitable Basis Based On Facts
- 5. 1. Calculate machine hours of each machine for a particular period (year quarter, moths or week) as follows:- • No .Of Working Days (365 –Holidays) • No .Of Working Hours Available per Day • Total No. Of Working Hours (A x B) • Less: Hours Required For Maintenance • Productive Machine Hours (If Set up Time Is Given / Assumed to Be Productive) • Less: Unproductive Set up Time (If Given / Assumed to Be Unproductive) • Machine Hours (E-F) Standing Charges per Machine Hour = Total standing charges Machine Hours Machine hour rate
- 8. Machine hour rate Illustrative Problem 1: The Genetry Company produces two products, X and Y. Estimated costs are presented below for a year in which 12,500 units of each product are expected to be sold: An annual profit of Rs 1, 50,000 for the whole company is considered satisfactory. The company uses the same gross margin percentage (i.e., mark-on) to arrive at the price for both products. Required: (a) Calculate selling prices for both products X and Y. (b) Using the prices calculated above, how much profit would result if sales were 15,000 units of X and 10,000 units of Y instead of 12,500 units of each? (c) Comment on the effect of changes in the product mix on total profit when the same margin percentage is used
- 10. Machine hour rate (c) The total company profit is Rs 180,000 in situation (B) as compared to Rs 1, 50,000 in (A) Note: Gross profit will be Rs 2, 70,000 as total profit is Rs 1, 50,000 after paying selling and administrative cost of Rs 1, 20,000. Thus, Gross profit = Selling and Admn. + Company profit = 1, 20,000 + 1, 50,000 = Rs 2, 70,000. Variable cost per unit = X, (3, 00, 000/12, 500) = Rs 24, and Y, (1, 50, 000/12, 500) = Rs 12