GlossaryKind of term: Cost and economicsUtilisation rate
What is the utilisation rate?
The utilisation rate is the ratio between the hours a machine or person works on orders and the hours that were available or that the hourly rate assumes.
The utilisation rate expresses what share of a chosen time base a machine or person was used productively. In operations it is usually order hours worked divided by available hours; a machine that runs, for example, 30 of 40 available hours on orders is at 75 per cent. In cost accounting it is actual activity divided by the normal activity the hourly rate was built on. The denominator you choose decides the figure, so state it alongside.
How does utilisation feed into the hourly rate?
A machine hour rate spreads fixed costs, such as depreciation, floor space and fixed maintenance, over an expected number of productive hours: normal capacity. When the machine runs more or fewer hours than normal, the rates recover more or less fixed cost than budgeted. That gap is the fixed overhead volume variance: actual minus normal hours, times the fixed cost per hour at normal capacity. It is adverse when you stay below normal capacity. A gap between actual and budgeted fixed costs is a separate spending variance.
How does the utilisation rate work in practice?
Recalculating the rate on actual hours makes it rise when utilisation falls and drop when it climbs. That can start a downward spiral: higher prices, fewer orders, lower utilisation still. Many companies therefore cost at normal capacity and report the volume variance separately. High utilisation has a price too: with variable work, queues and lead times grow sharply as a machine approaches full load, and there is little room for rush work. Measure machines and people separately: an operator tending two machines has a different utilisation from each machine.
What is the utilisation rate often confused with?
Utilisation is not OEE. Utilisation says whether there was work on the machine; OEE says how well planned production time was used, combining availability, performance and quality. Time without orders is not counted as a loss in the usual OEE definition. Productive hours are something else again: they are the hours in the rate's denominator, whereas utilisation is a ratio.
Frequently asked questions
How do you calculate machine utilisation?
Divide the hours the machine worked on orders in a period by the hours available in the same period, and multiply by a hundred. Define what counts as available, for example the shift pattern minus planned maintenance, and use booked hours.
What is a volume variance?
The difference between the fixed costs recovered through the rates and the budgeted fixed costs, caused by activity departing from normal capacity. Run fewer hours than normal and it is adverse: part of depreciation and floor space goes unrecovered.
Should you raise the hourly rate when utilisation drops?
Not automatically. If you cost at normal capacity, the rate stays the same and the under-recovery shows as a volume variance. Raising the rate can cost orders and lower utilisation further. Passing it on is a commercial choice.