Machine Hour Rate 71v2u

Question Bank for students

11/3, flat “A” Butler Road, Opp. Narmada Bhawan, Dalibagh, Lucknow-226001 Q1: what is machine hour rate? A1: Machine hour rate or MHR is the overhead recovery rate, which is calculated to absorb machine cost to various products. Suppose there are 5 machines which perform various tasks in the manufacturing of any product. Every machine cost comprising of the following has to be absorbed in the product: 1. machine deprecation 2. power 3. fuel, accessories and lubricants 4. operator’s wages 5. cleaner’s wages 6. lighting 7. rent 8. insurance 9. taxes 10.interest on capital (where applicable) 11.Other costs. Once the MHR for each machine is calculated, then product cost can be calculated using the following formula: • Machine hour rate X hours consumed by each product in the production process.

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Q2: what types of machine hour rate are usually calculated? A2: the machine hour rates are of two types (usually)

MHR

Single machine hour rate or comprehensive machine hour rate.

Dual Machine hour rate

Set-up hourly rate

Productive hour rate

The single rate is usually calculated when there is one product in the manufacturing process. However, when the number of products involved is more than one then calculation of Machine hour rate in dual mode becomes a necessity. This is for the simple reason that not every product is consuming the same activities on the machine. Like some products may be using more set-up hours as compared to others hence calculating one rate will render the cost inaccurate and consequently the whole process of costing becomes meaningless. Therefore in the event of more than product dual rate is recommended until and unless circumstances warrant otherwise Q3: What are the steps involved in calculating the machine hour rate? A3: The steps involved in MHR are as follows: 1. Calculate machine hours worked. This may be single or dual a. Single means productive hours b. Dual means productive hours and set up hours 2. calculate the costs under various head viz. Variable, fixed and semi variable 3. classify cost into set up cost and operating cost 4. Divide set up cost by set up hours and operating cost by productive hours to get the machine hour rate. 5. Use this machine hour rate to perform the costing activity.

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Q4: please provide a format of cost sheet in calculating the machine hour rate? A4: The cost sheet using marginal technique is as under: Particulars

Amount in Rs. Absolute

Amount in Rs per machine hour

Fixed cost: Rent Electricity Supervision and indirect labour Lighting Deprecation Operator’s wages Bonus to operator General management expenses Sundry works expenses Insurance Semi Variable: Repair and maintenance Variable expenses Power Sundry oil and lubricants Tools consumed (only if consumed in the production process total

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Question bank for students Single/Comprehensive machine hour rate: Q1: A machine costing Rs. 10,000 is expected to run for 10 years. At the end of the productive life its scrape value is likely to be Rs. 900.00. Repairs for the whole life are expected to Rs. 18000 and the machine is expected to run 4,380 hours per year on an average. Its electricity consumption is 15 units per hour and the rate per unit is Rs.0.05. The machine occupies ¼ area of the production department and has two points out of a total of 10 for lighting. The foreman has to devote about 1/6 of his time to the machine. The monthly rent of the department is Rs. 3000 and the lighting charges amount to Rs. 80 per month. The foreman is paid a monthly of RS. 960.00. Find out the machine hour rate, assuming insurance is @1% p.a. and the expenses on oil etc. are of 9 per month. A1: Yearly hours :4380 hours Monthly hours: 365 hours MHR for the month of -----------Particulars Amount in Rs. Amount in Rs Absolute per machine hour Fixed cost: Rent ¼ 75.00 Lighting 16.00 Foreman’s salary 160.00 Deprecation 75.83 Sundry oil waste etc 9.00 .943 Insurance 8.33 Semi Variable: Repair and maintenance 150.00 .411 Variable expenses Power/Electricity 273.75 total 767.91 Working notes: 1. Depreciation: 10000-900/10=910/12=75.833333 2. insurance= 10000*1%/10/12=8.33

.750 2.104

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Q2; A machine shop has 8 identical drilling machines manned by 6 operators. The machine cannot be worked without an operator wholly engaged on it. The original cost of all these machines works out to be Rs. 8 lac. These particulars are furnished for a 6 month period: Normal available hours per month : 208 Absenteeism (without pay) hours: 18 Leave (with pay) hours : 20 Normal idle time unavoidable hours : 10 Average rate of wages per worker for 8 hours a day RS. 20 Production bonus estimated 15% of wages Value of power consumed RS. 8050.00 Supervision and indirect labour: RS. 3,300.00 Lighting and electricity : Rs. 1200.00 These are for a year period: Repair and maintenance including consumables 3% of value of machines Insurance Rs. 40000.00 Depreciation 10% of original cost Other sundry works expenses RS. 12000.00 General management expenses allocated Rs. 54, 530.00 You are required to work out a comprehensive machine hour rate for the machine shop A2 : steps in solving the question: 1. calculate the machine hours(productive) Productive hours are Normal hours 208 Less absenteeism -18 Less leave hours -20 Less idle hours -10 = 160 hours per month or 160 X 6 months x 6 machines =5760 hours 2. This question can be solved either on 6 months basis or yearly basis because data is equally provided for 6 months as well as yearly basis. However, we must take the smaller denomination. 3. salary of operators is for 208-18=190*6*6=6840 hours Wages are 20 for 8 hours or 2.5 per hour hence total wages = 17,100.00 only. MHR for 6 months period hours = 5760 Particulars Amount in Rs. Amount in Rs Absolute per machine hour Fixed cost: Operator’s wages 17,100.00 Bonus to operator @15% 2565.00 Supervision and indirect labour 3300.00 Lighting 1200.00

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Deprecation 10% for ½ year General management expenses ½ Sundry works expenses ½ Insurance ½ Total Semi Variable: Repair and maintenance 3% of 8 lac for ½ year.

40000.00 27,265.00 6,000.00 20,000.00 117430.00

20.39

12,000.00 2.08

Variable expenses Power Sundry oil and lubricants Tools consumed (only if consumed in the production process total

8,050.00

137480.00

1.40 23.87

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Dual rate questions: Q3: Bonjour (BohN Zhoor) Enterprises undertakes three different jobs A, B, and C. All of them require the use of a special machine and also the use of a computer. The computer is hired and the hire charges work out to Rs. 4, 20,000.00 per annum. The expenses regarding the machine are estimated as follows: Particulars Rent for the quarter Depreciation per annum Indirect charges per annum

Amount Rs. 17,500.00 2,00,000.00 1,50,000.00

During the first month of operation the following details were taken from the job : Particulars J O B A B C Number of hours the machine was used (a) without the use of computer 600 900 0 (b) with the use of computer 400 600 1000 Your are required to compute the machine hour rate 1. for the firm as a whole for the month when the computer was used and when the computer was not used 2. for the individual jobs A, B and C A3: the following steps are necessary to compute the above: Total hours without the computer : 600+900=1500 Total hours with the computer : 400+600+1000=2000 1. The calculation should be based on per month basis, because the jobs data are given on first month. 2. computer hiring cost is 4,20,000/12=35000.0 3. machine cost is also 17500*4 + 2,00,000 +1,50,000= 4,20,000/12=35000.00 Now calculation should be as follows: (a) Machine hour rate for the firm as whole: Particulars With the use of Without the use total computer of computer Hours 2000 1500 3500 Computer cost 35000.00 0 35000.00 Machine cost in the 20000.00 15000.00 35000.00 ratio of hours worked i.e. 2000:1500 Total cost 55000.00 15000 70000.00 MRH 27.50 10

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(b) Machine hour rate for individual jobs: A B Particulars Rate/hr Hrs Rs. Hrs Without 10.00 600 6000 900 computer With 27.50 400 11,000 600 computer Total 1000 17000 1500 Rate /hr (Cost/hrs) 17

RS. 9000

C Hrs 0

Rs. 0

16,500.00 1000

27,500.00

25,500 17

27500.00 27.50

1000

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