Machine-hour definition
/What is a Machine-Hour?
A machine-hour is a measurement used to apply factory overhead to manufactured goods. It is most applicable in machine-intensive environments where the amount of time spent in processing by a machine is the largest activity upon which overhead allocations can be based. When there are few machines in production, it is more common for labor hours to be the basis upon which factory overhead is allocated to produced goods.
How is the Machine-Hour Concept Used?
The machine-hour concept has several applications, including the following:
As a cost driver. The machine-hour concept is frequently used within activity-based costing, where it is employed as a cost driver. A cost driver triggers a change in the cost of an activity. As an example, the machine-hours used to manufacture goods drive the cost of operating the machines in a production cell. These costs include electricity and machine maintenance. Thus, by monitoring machine-hours, a business can better allocate associated costs to the goods being produced.
For billing. In some industries, machine hours are used to determine pricing or billing, such as in job shops or construction equipment rental.
Indicator of wear and tear. Machine hours are tracked to monitor maintenance schedules and the lifespan of equipment. Regular servicing is often scheduled after a set number of machine hours.
Example of a Machine-Hour
A widget consumes one hour of machine time. During the month, machines were used for a total of 1,000 hours. In the period, the company incurred $20,000 of factory overhead. Based on this information, the amount of overhead to be allocated to the widget is:
(1 hour used ÷ 1000 Total machine hours) x $20,000 = $20 Allocated overhead