GlossaryKind of term: Cost and economicsMachine hour rate
What is a machine hour rate?
The machine hour rate is the cost of one productive hour on a machine: its annual costs divided by the productive hours you expect from it.
Each machine gets a rate of its own. It holds the machine's fixed costs, such as depreciation, interest on capital employed, floor space and insurance, and its variable costs, such as energy, maintenance and often coolant. Whether the operator and a share of overheads are included differs per company: some use an all-in rate, others a bare machine rate plus a separate labour rate.
What does the machine hour rate depend on?
The rate comes from dividing annual costs by the productive hours you expect from that machine, not by the hours it is switched on. That denominator matters a great deal: the same machine with fewer productive hours gets a higher rate. That is why rates differ per machine, and not only by size: a large machine with low capital cost and high utilisation can cost less per hour than a new small one that runs little. Depreciating on book value makes a written-off machine look artificially cheap; many shops therefore depreciate on replacement value. Unmanned hours, on a night shift for example, lower the rate when counted, but only if they are actually run.
How does the machine hour rate work in practice?
One average rate for the whole shop shifts cost between parts: work on an expensive 5-axis machine comes out too cheap, work on a simple machine too dear. Check what is already in the rate before adding mark-ups or margin; if profit or a general mark-up is in it, it would otherwise end up in the price twice. Review the rate when investments, energy prices or utilisation change.
What is the machine hour rate often confused with?
The machine hour rate is not an hourly selling rate: what you charge a customer per hour includes margin. Nor is it the labour rate: that is the cost of an hour of an employee's time, which does not track machine hours when the machine runs unmanned or one operator runs several machines.
How do you see the machine hour rate in Blake?
In Blake you record your own hourly rate per machine, beside its working envelope and axes. The machining lines calculate with that machine's rate. More on the factory.
Frequently asked questions
How do you calculate a machine hour rate?
Add up the machine's annual costs: depreciation, interest, space, energy, maintenance and possibly a share of overheads. Divide by the productive hours you realistically expect. The choice of hours weighs as much as the costs themselves.
Is margin inside the hourly rate?
As a cost rate, no: the machine hour rate is a cost per hour. Some shops still work with a rate that includes profit; that is really a selling rate. Add margin to the cost price on top and the profit is in there twice.
Should the operator be in the machine hour rate?
That works when one operator runs one machine. If one person runs several machines or the machine runs partly unmanned, a separate labour rate gives a more accurate picture.