How do you calculate a machine hour rate?

What is a machine hour rate?

A machine hour rate is what one hour on a particular machine costs your shop. You add up that machine's costs over a year and divide them by the hours it is occupied by orders.

The hourly rate belongs to the cost price of a part. The selling price is that cost price with your margin on top. The owner sets that margin per customer, material or risk. If profit is already built into the rate, the quote counts it twice.

Work out a rate per machine rather than one average for the whole business. A new 5-axis machine costs something different per hour from an old 3-axis one; one average makes work on the big machine too cheap and work on the small one too dear. An ACCA technical article grants that one absorption rate for all overheads is quick and easy, but warns that it is probably too simple.

Record each rate once in your machine registry, so everyone who prices work uses the same figure. How that rate then lands in a cost formula is shown in Excel estimating.

What costs go into a machine hour rate?

These items belong in the rate of a machining centre or lathe. Most come straight from your books: the purchase from the fixed asset register, the rest from last year's cost accounts.

Depreciation for pricing need not match the figure in your annual accounts. Tax rules set their own limits: the Dutch tax authority, for instance, caps depreciation at 20 per cent of the purchase cost a year and lets you use the economic life where it is shorter than the technical one. For the rate, choose the years in which the machine has to earn its money back.

The operator's wage is deliberately missing; it gets a rate of its own.

• Depreciation: purchase price minus residual value, divided by the useful life in years.
• Interest on the average capital employed: with straight-line depreciation, on average half of purchase price plus residual value is tied up in the machine. That half times the interest rate is the yearly interest item.
• Maintenance: servicing, repairs and spare parts.
• Tooling and coolant for general use; special tooling for a single order belongs to that order.
• Floor space: the share of rent or building costs for the machine's footprint, including room to operate it and to set down raw and finished parts.
• Energy: power for the machine, extraction and compressed air.
• Insurance of the machine.
• Software that goes with the machine, such as licences and updates.

How many productive hours should you divide by?

The divisor shapes the rate as much as the costs do. Productive hours are the hours the machine is taken up by an order: setting up, cutting, measuring the first article. Maintenance, breakdowns and hours without work do not count. Divide by hours the machine never runs and the rate comes out too low, along with every price built on it.

The German guideline VDI 3258 Part 1, as the publisher Haufe summarises it, makes that divisor concrete. Start from the running time a year theoretically allows and take off standstill and maintenance. Standstill has three parts: days without work, the hours of a working day left idle when you run one or two shifts, and a percentage from experience for stoppages caused by operations or production.

A formula taught in Dutch business economics splits the costs. Fixed costs such as depreciation, interest, floor space and insurance go over the normal number of machine hours; variable costs such as energy, tooling and part of the maintenance go over the hours budgeted for this year. A quiet year then does not push the rate up: the empty hours show as under-recovery in your own figures, not as a higher price for the customer.

If the machine also runs unattended, say in the evening on a batch that runs stably, those hours count too. The difference between manned and unmanned hours lies in the operator beside the machine. The machine rate itself stays the same.

A worked example: from €77,000 to €35 an hour

An example with round numbers: take a milling machine of €400,000, depreciated over 10 years with no residual value, and 5 per cent interest on the average capital employed. With the items from the list, that comes to a yearly total of €77,000.

Divide that €77,000 by 2,200 productive hours and the machine rate is €35 an hour. In this example the 2,200 hours are one day shift plus some unattended hours in the evening.

Now put an example operator rate of €50 beside it. A manned hour then costs €85 and an unmanned hour €35. Charge €85 for every hour and the unattended evening hours come out €50 too dear. Charge €35 for every hour and the operator vanishes from the price.

Does labour belong inside the machine rate?

A rate with the operator built in is common practice. It works as long as every hour is manned and each machine has its own operator.

Subduxion keeps machine and labour apart, as two rates. Manned or unmanned is then not a factor on a single rate: a manned hour is machine plus operator, an unmanned hour is the machine alone. Labour is never counted twice that way, not even when one operator walks between two machines.

If one operator runs two machines at once, split the operator's rate across both: in the example, €25 of labour per machine hour instead of €50. Build the operator rate from gross wage, employer's costs and the hours someone actually spends at the machine.

Which hours go at which rate?

An order occupies the machine even when no chips are flying. While it is being set up the spindle mostly stands still, but the machine is committed to that order and the operator is at it. Setup time goes at the manned rate. How the number of setups drives that time is covered in counting setups.

Cycle time goes at the manned rate when someone is at the machine and at the unmanned rate when the batch runs unsupervised. Programming time belongs to the programmer, at their own rate, unless the programming happens at the control and the machine is occupied all that time.

Put each time on its own estimate line, with time, rate and quantity beside it. The quote then shows where the money sits: in setting up and programming for a small batch, in cycle time for a large one. How that split shifts with quantity is the subject of why a small batch costs so much per part.

What do you do with a fully depreciated machine?

After 10 years the example machine stands at zero in the books, and €40,000 of depreciation drops out of the yearly total. Take the depreciation from the books and that item disappears from the rate and from every quote on that machine, while its successor still has to be paid for out of the same hours. Your ERP and your accounts record what the machine cost. What it still has to earn is a decision for the shop, and that decision belongs in the rate.

Two choices hold up. You keep charging depreciation on the replacement value, so the rate saves for the next machine. The German method Haufe describes has that variant: depreciation per machine hour is then the replacement value divided by the useful life in years times the running hours per year. Or you drop the depreciation on work where you want to bring the price down; that is then a pricing decision, not a lower cost price.

An older machine sometimes takes longer over the same part. A lower rate on a machine that runs twice as long can make that part more expensive. Compare the cost per part, not the rate per hour.

Review the rates once a year: energy, rent and maintenance move, and last year's productive hours are a sound starting point for this year's divisor. The post-calculation shows whether the booked hours match the budget; estimate and actual per operation covers that.