# Doubt ?? Machine hour rate

Krish (CA Final ) (3326 Points)

03 March 2011

QUESTION :

In a factory, a machine is considered to work for 208 hours in a month. It includes maintenance time of 8 hours and setup time of 20 hours.

The expense data relating to the machine are as under.

Fixed Expenses (Per month)

-          Depreciation – 4000

-          Rent of building – 1000

Variable Expenses (Per month)

-          Repairs and maintenance – 5040

-          Consumable stores – 3960

Calculation of two-tier machine hour rate for running time.

SOLUTION :

a)      Effective hour per month of the machine for recovery of fixed expenses

= 208 Hrs – 8 Hrs = 200 Hrs.

b)      Effective hour per month of the machine for recovery of variable expenses

= 208 Hrs – 8 Hrs – 20 hrs = 180 Hrs.

Comprehensive two tier machine hour rate :

= (Fixed Expenses/Effective hours) + (Variable Expenses / Effective hours)

= (5000 / 200 Hrs) + (9000 / 180)

= 25 + 50

= Rs 75 per hour of running time.

My doubt is why don’t we include maintenance time (i.e. 8 Hrs) for calculation of Effective hour of fixed expense?

sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 03 March 2011

Yes I also I have the same doubt  Fixed expenses should be divided by 208 hrs only and not 200hrs

The explanation is whether you run the machine or not it will be divided by standard hrs namely 208 hrs

let other experts also give opinion on that why 200 hrs instead of 208 hrs

why maintenance hrs of 8 hrs redcued for calculating effective machine hr rate for fixed expenses

Vivek Kurup (.) (355 Points)
Replied 03 March 2011

I think there is a mistake in the solution since the MHR recovers more than the actual OH.

ie.

Recovery using MHR =75 * 200 HRS = 15,000 (if set-up time is productive)

Actual OH (4000+1000+5040+3960)= 14,000

Excess recovered = 1000/-

Anyway, to your question, my answer is to plz refer to the concept of MHR

We have to recover the OH (both Fixed and Variable) within the productive hrs of the machine.

Both Set-up time and maintenance time cannot be termed as productive because the machine doesn’t fetch any benefits during this time. But; if the circumstances (here the question) asks for such an assumption, we have to treat them as productive and then, the effective working hours will be 208 hrs. (Considering both maintenance and set-up time as productive)

Here, the productive hours of the machine is only 180 hrs ie. (208 - 8 - 20)hrs. Therefore, in my opinion fixed expenses should be recovered within 180 hrs. ie. Rs5000/180 = 27.78 phr.

However, the solution didn't take such treatment; may be due to a possibility that the question might specifically recommend treating set-up time as productive.

Please referrer to the qst again to see whether set-up time is considered as productive. If it is not,27.78 is the correct standing charges p.h.

If set-up time is considered productive, then the effective hours will be Total hrs(208) – unproductive hours(8) = 200 hrs.

Hope you understand my idea…

(Guest)

Deduction in respect of machine setting time, noraml idle time, time lost for normal repairs, maintenance etc. should be made to ascertain the expected effective hours of work. So maintenance time should not be taken  . The question is silent aobut set up time ..i.e it should also mention that 'set up time' is productive and thats why it is 180+20=200

sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 03 March 2011

Thanks Mr Vivek Kurup and Mr Vinzz for sharing your knowledge

sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 03 March 2011

But my opinion Fixed expense on Standard Hrs not on productive hrs do u want to debate on that whether u run the machine or not then in such cases fixed expenses are to be divided only on 208 hrs ? debate on this

Vivek Kurup (.) (355 Points)
Replied 03 March 2011

Again referring to the concept of MHR, we can find that MHR is the cost per hour for running a machine and it is used for recovering the whole OH incurred during the production process.

It is illogical to see that the machine recovers the fixed cost of the factory when it is inoperative . Therefore, it must not only recover the fixed cost incurred during its working time but also Fc incurred when it  was non-productive.

If we use std hrs for recovering FC, the cost of running the machine excludes the FC occurred during its idle time.

Consider an example:

Fixed Cost : 5000,

Var Cost 6000,

Total Cost 11000

STD HRS: 500

Prod. HRS: 400

Comprehensive MHR = MHR (FC)10 phr + MHR (VC) 15 phr = 25 phr

However we can see that the actual cost of running the machine per hour is not 25 p.h, since, 25*400 hrs will give you only 10000, where the actal OH is 11,000

From this we can see that FC during non-productive time (Rs.10 p.h * (500hrs-400hrs)), which is equal to 11,000 – Rs10,000, is not recognised in calculating the comprehensive MHR.

Therefore to include FC in CMHR we should take productive hrs only, so that Total FC (ie. FC during non-productive time also) is included in the running hours the machine.

Krish (CA Final ) (3326 Points)
Replied 03 March 2011

Thank you Mr. Vivek Kurup for sharing your knowledge, now i have got my answer. Thanks to Mr. Sivaram and Mr Vinnzz also to be a part of this discussion.

I had mentioned only part of the question for sake of Convenience. Actually Set up time has covered under productive hours as per original question.

Refer Attached file for original question and solution.

Rajat Jain (Student CA IPC / IPCC) (87 Points)
Replied 08 October 2015

If set up time is productive , why it is not taken into account while calculating effective hrs for variable cost ???

MAYANK JAIN (Executive) (27 Points)
Replied 12 April 2018

I think Maintainence cost is based on concept of normal loss i.e. it is unavoidable as nothing is mentioned in question we can treat it necessary to make such expense every year.price will be inflated of machine hour rate by subtracting Maintainence hour from total hour to calculate effective machine hour rate

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