What one hour on that machine actually costs you.
Fixed costs spread over running hours, plus what the machine consumes while it runs — the rate a job should be quoted at.
Cost breakdown
- Annual fixed cost
- ₹7,50,000.00
- Fixed cost per hour
- ₹416.67
- Variable cost per hour
- ₹220.00
- Machine hour rate
- ₹636.67
One hour on this machine costs ₹636.67. That is a cost, not a price — the margin goes on top of it.
Quoting a machining job means knowing what an hour on the machine costs. Most workshops answer that from habit — a figure somebody arrived at years ago and has adjusted upward occasionally — and the figure is usually too low, because the costs that are easy to forget are the large ones.
A machine hour rate has two halves. Fixed costs happen whether the machine runs or not: depreciation, the space it occupies, insurance, the maintenance contract. Spread across the hours it actually runs, they become a per-hour figure. Variable costs happen only while it runs: power, consumables, the operator's time.
The half that catches people out is the divisor. A machine costing ₹6 lakh a year to own is ₹300 an hour at 2,000 running hours and ₹600 an hour at 1,000. Utilisation, not cost, is usually what makes a rate wrong.
The formula
- Fixed cost per hour
(Depreciation + Maintenance + Other overheads) ÷ Running hours per year- Variable cost per hour
Power per hour + Operator wages per hour + Consumables per hour- Machine hour rate
Fixed cost per hour + Variable cost per hour
Running hours is the number that decides everything
A machine is not available 8,760 hours a year. Subtract the shifts you do not run, holidays, planned maintenance, breakdowns, setup time and the hours it simply sits waiting for work. What is left — the hours it is actually cutting — is the divisor.
Using the theoretical figure instead of the real one is the single most common way a machine hour rate ends up understated. A rate calculated on 3,000 hours when the machine truly runs 1,800 is forty percent too low, and every job quoted from it carries that error.
What to include and what to leave out
Include depreciation on the machine and its tooling, the interest on whatever financed it, floor space at whatever your rent works out to per square foot, insurance, the annual maintenance contract, and an allowance for breakdown repairs. Include the operator, power at the machine's actual draw rather than its nameplate rating, and consumables like coolant and inserts.
Leave out company-wide overheads that have nothing to do with this machine — sales salaries, the office, marketing. Those belong in the margin you add on top, not in the cost of an hour of machining. Mixing them in makes the rate look defensible while making job comparisons meaningless.
The rate is a cost, not a price
What comes out of this calculation is what the hour costs you. It is not what to charge. The price adds a margin, and it also has to absorb the estimating error, the rework that is nobody's fault, and the jobs that are quoted and never won.
Knowing the cost precisely is what makes that margin a decision rather than a hope. A workshop that knows its rate can accept a thin job knowingly during a slow month; one that does not accepts thin jobs without realising, and wonders where the year went.
Questions people ask.
What is machine hour rate?
The cost of running a machine for one hour. Fixed costs — depreciation, space, insurance, maintenance — divided by the hours the machine actually runs, plus the variable costs it incurs while running, such as power, consumables and the operator.
How do I calculate machine hour rate?
Add the annual fixed costs and divide by the machine's actual annual running hours to get a fixed cost per hour. Add the per-hour variable costs — power, wages, consumables. The sum is the machine hour rate.
Should I use available hours or actual running hours?
Actual running hours. Using theoretical availability is the most common reason a rate comes out too low: a machine costed on 3,000 hours that really runs 1,800 understates every job quoted from it by around forty percent.
Should office and sales overheads be included?
No. Keep company-wide overheads out of the machine rate and recover them in the margin you add. Mixing them in makes the rate look thorough while making comparisons between machines and jobs meaningless.
Is the machine hour rate what I should charge?
No, it is what the hour costs. The price adds a margin on top, which also has to cover estimating error, rework and the quotations that are never converted.
Other free tools
Doing this for every item, every day?
A calculator is the right tool once. When it is every item in the store, it belongs in the system that already knows the numbers.