Machine Hour Rate Calculator
Depreciation, maintenance, energy and labour in one hourly rate.
Machine hour rate
$6.41
- Fixed cost per hour Depreciation plus maintenance, spread over operating hours.
- $4.25
- Energy cost per hour
- $2.16
- Annual depreciation
- $11,000
- Annual fixed cost
- $17,000
Machine hour rate is the cost of keeping a machine available for one hour, whether or not it produces anything. It is the figure you need for make-or-buy decisions, for quoting a job, and for deciding whether that 15-year-old press is actually cheap or just old. The two most commonly omitted components are depreciation and energy, and leaving them out typically understates the rate by 40 to 60 percent.
The structure here follows the standard absorption-costing approach: annual fixed costs (depreciation plus maintenance) spread over annual operating hours, plus the hourly variable costs of energy and direct labour. Note the denominator — annual operating hours is not calendar hours. A machine that sits idle for half the year has to recover its fixed cost in the hours it actually runs, which is why low-utilisation assets carry a punishing hourly rate.
How the result is calculated
Machine hour rate = (Depreciation + Maintenance) ÷ Annual hours + (kW × Energy price) + Labour per hour- Depreciation per year = (Purchase price − Salvage value) ÷ Life in years
- Fixed cost per hour = (Depreciation + Annual maintenance) ÷ Annual operating hours
- Energy cost per hour = Average load in kW × Price per kWh
- Machine hour rate = Fixed per hour + Energy per hour + Direct labour per hour
Variables
| Symbol | Meaning | Unit |
|---|---|---|
P | Purchase price | currency |
S | Salvage value | currency |
L | Depreciable life | years |
H | Annual operating hours | hrs/yr |
kW | Average load | kW |
Worked example
A CNC machining centre costs $120,000, has an expected salvage value of $10,000 after 10 years, and runs 4,000 hours a year. Maintenance and spares average $6,000 a year. It draws an average of 18 kW at $0.12/kWh. Labour is costed separately.
- Depreciation = (120,000 − 10,000) ÷ 10 = $11,000 per year
- Annual fixed cost = 11,000 + 6,000 = $17,000
- Fixed cost per hour = 17,000 ÷ 4,000 = $4.25
- Energy per hour = 18 × 0.12 = $2.16
- Machine hour rate = 4.25 + 2.16 = $6.41 per hour
The machine costs $6.41 for every hour it is available, before any labour. If utilisation dropped to 2,000 hours a year, the fixed component would double to $8.50 and the rate would rise to $10.66 — the same machine, the same output per hour, twice the cost per hour, purely because of idle time.
What this calculation does not cover
- Straight-line depreciation is assumed. If your finance function uses reducing balance or a different tax life, substitute their annual depreciation figure for the calculated one.
- Average load is not the same as connected load. Nameplate kW on a machine tool is the maximum; typical average draw is 30–50% of that. Using nameplate alone can triple the energy component.
- Fixed overheads such as floor space, supervision, quality inspection and material handling are excluded. For a true fully-absorbed rate, add those allocations on top.
- This is a cost rate, not a charge-out rate. Quoting prices need a margin on top, and margin should be applied to the total job cost, not bolted onto the hourly rate.
- Idle time is not a separate line here — it is implicitly recovered through the operating-hours denominator. If utilisation varies significantly by month, calculate the rate per utilisation scenario rather than using one annual average.
Frequently asked questions
What is the difference between machine hour rate and labour hour rate?
Machine hour rate recovers the cost of the equipment — depreciation, maintenance and energy — per hour of availability. Labour hour rate recovers the cost of the person. On automated equipment the machine rate usually dominates, which is why quoting jobs using labour hours alone tends to lose money on exactly the work you are best equipped to do.
Should I use connected load or average load for the energy calculation?
Average load, always. Connected load is the breaker rating or the sum of nameplate ratings; a machining centre with a 30 kW spindle rarely averages more than 10–15 kW across a cycle because the spindle is not cutting at full load continuously. If you have no meter data, 40% of connected load is a reasonable first estimate for metalworking equipment.
Why does my machine hour rate seem too high compared with what we charge?
Either utilisation is low, or the rate is being compared against a labour-only figure. If the machine runs 1,500 hours a year instead of the 4,000 assumed in a standard cost model, the fixed component is nearly three times higher. Check the operating-hours denominator first — it is the single largest source of disagreement between calculated and assumed rates.