Every quote a machine shop sends depends on one number that is often guessed: what one hour of the machine really costs. Many shops still use "the rate everyone in the area charges" for a VMC or a CNC lathe. That works until a new machine on a loan, a power tariff revision or a slow month quietly turns a profitable job into a loss. Working out your own machine hour rate (MHR) once a year, and checking it when costs change, gives you a floor below which you should not quote.

What machine hour rate means

The cost accounting definition, quoted in teaching notes from Vivekananda College, Kolkata, is a rate found by dividing the cost to be absorbed by the number of hours for which the machine is operated. The formula is:

Machine hour rate = Total overheads of the machine (cost centre) ÷ Effective machine hours

The two halves need equal care. Shops usually get the cost list roughly right and the hours badly wrong.

Which costs go into the rate

Cost accountants split the costs into two groups.

Standing (fixed) charges are incurred whether the machine runs or not:

  • Rent or the floor-area share of the building
  • Insurance of the machine
  • Supervision, apportioned by the time the supervisor spends on this machine
  • Shop lighting and general departmental overheads

Running (machine) expenses move with the hours the machine runs:

  • Depreciation, usually (cost + installation − scrap value) ÷ useful life
  • Power, at the units the machine draws per hour times your tariff
  • Repairs and maintenance, spares
  • Coolant, lubricants and consumable stores

Operator wages are added on top to give what the notes call a comprehensive machine hour rate. In some textbook problems, such as those in this ICAI question set on overheads, operator salary is treated as a standing charge instead. Either way, include it once and say clearly whether your rate includes the operator.

One point the ICAI answers make: interest on capital is treated as a financial matter and excluded from cost accounts. For quoting, you still need to recover your EMI interest and working capital cost somewhere, usually in the margin, so do not forget it just because it is outside the MHR.

Getting the hours right

Effective hours are normal working hours minus normal idle time. The ICAI examples deduct Sundays, holidays and half days, then take a capacity percentage and deduct maintenance and breakdown time. They also treat setup time carefully: in one answer the rate comes out higher when setup is treated as unproductive and lower when setup counts as productive time. Power is charged only for running hours, since the examples assume no power is drawn during maintenance or setup.

For a job shop, the honest question is: how many hours per year does this machine actually cut chips on paid jobs? Use your own logbook or controller data, not the 24-hour dream.

A worked example for a VMC

Illustrative numbers only, for one VMC on two shifts:

  • Hours: 300 days × 2 shifts × 8 hours = 4,800; less 10% for maintenance, breakdowns and waiting = 4,320 effective hours
  • Standing charges: rent share, insurance, supervision share and lighting = ₹3,70,000 a year, or ₹85.65/hour
  • Depreciation: (₹40,00,000 − ₹4,00,000 scrap) ÷ 10 years = ₹3,60,000 a year, or ₹83.33/hour
  • Power: 12 units per hour × ₹9 = ₹108.00/hour
  • Repairs: ₹1,50,000 a year = ₹34.72/hour; coolant and consumables ₹60,000 a year = ₹13.89/hour
  • Machine rate without operator: ₹325.59/hour
  • Operators: ₹6,00,000 a year for two = ₹138.89/hour, giving a comprehensive rate of about ₹465/hour

Now suppose the machine only runs 3,000 effective hours. Everything fixed per year gets spread over fewer hours: standing charges become ₹123.33, depreciation ₹120, repairs ₹50, consumables ₹20, operators ₹200, while power stays ₹108. The comprehensive rate jumps to about ₹621/hour.

Utilisation moves your machine hour rate more than almost any single cost line, so plan your hours as carefully as you list your costs.

Using the rate when quoting

  • Multiply the rate by realistic cycle time plus setup time divided by batch size. Small batches carry heavy setup cost per piece.
  • Add material, tooling, outside processes (heat treatment, plating), inspection time and packing separately.
  • Then add margin. The MHR is cost, not price.
  • Keep separate rates for a 3-axis VMC, a turn-mill and a manual lathe. One blended shop rate hides which machines are losing money.
  • Revisit the rate when power tariffs, rent or loan terms change.

How SpecReview helps

SpecReview's should-cost estimate gives you an independent view of what a part should cost from the drawing and the STEP model, so you can compare it with your own machine-hour-based quote. Each input is tagged as coming from the spec, the geometry or an assumption, which makes it easy to replace an assumption with your actual machine hour rate.