David Krause6.1 What is the machine hour rate?
The machine hour rate (MHR) quantifies what one hour of machine running time costs the company — regardless of who operates the machine and what it is producing at the moment. It answers a question that flat-rate surcharges cannot: why does an hour on the 5-axis machining center cost a multiple of an hour at the assembly bench?
A company with a flat manufacturing-overhead surcharge applies the same markup on labor to every cost center. Capital-intensive equipment is therefore systematically quoted too cheaply, labor-intensive stations too expensively. The result: you win the orders you lose money on, and lose the ones you would have earned on. The MHR makes that difference visible.
Between the flat surcharge and the machine hour rate lies an intermediate stage many companies already run: the differentiated overhead surcharge. Instead of a single markup for the whole plant, each manufacturing cost center gets its own percentage on direct labor. That is real progress over the flat rate — but it only partly solves the underlying problem.
| Stage | Reference base | What it achieves | Limit |
|---|---|---|---|
| Flat overhead surcharge | one % rate on direct labor, plant-wide | simplest costing, minimal effort | cross-subsidizes capital vs. labor centers completely |
| Differentiated overhead surcharge | own % rate per cost center, on direct labor | separates expensive from cheap areas — as long as costs follow labor | fails once machine cost > labor cost: the "on labor" base no longer holds |
| Machine hour rate (MHR) | € per machine hour, remainder as residual overhead on labor | allocates machine-related cost by cause | higher data effort (replacement value, useful life, productive hours) |
The decisive test is the reference base: an overhead surcharge scales overhead proportionally to direct labor. That works as long as a center's overhead actually rises with labor input — i.e. at labor-intensive stations (assembly, welding, manual work). But once a machine causes the bulk of the center's cost and keeps running whether an operator stands next to it or not, the labor base decouples the allocation from the wrong driver: a quick setup job with little labor carries too little machine cost, a long unattended run with little labor presence too much. Exactly here — and only here — is the switch to the MHR worth it. As a rule of thumb: once the machine-cost share of a center exceeds roughly 30 % of manufacturing cost, even the differentiated surcharge distorts; below that it is sufficient. The systematic decision rule is in Chapter 9.
6.2 MHR and residual overhead — the decisive split
The methodological core distinction lies in splitting the overhead. Machine-related costs are allocated per machine hour, labor-related costs as a percentage surcharge on direct labor. This split prevents wage changes from distorting the machine hour rate — and vice versa.
| MHR costs machine-related → €/MH | Residual overhead labor-related → % on direct labor |
|---|---|
| Imputed depreciation on the replacement value | Indirect wages (setters, transport) |
| Imputed interest (replacement value × i × 0.5) | Salaries of foremen and shift leads |
| Energy cost (electricity, compressed air) | Social costs on overhead wages |
| Maintenance and servicing | Insurance (pro rata) |
| Consumable tools, indexable inserts | Other center overhead |
| Space cost (pro rata by floor area) | — |
| MHR = Σ machine costs / productive hours | Residual % = Σ labor overhead / direct labor × 100 |
Cost center 200 (turning) from the BAB in Chapter 5: MHR €20.13/MH, residual overhead 39.8 % on direct labor. An order with 2 machine hours and €85 of direct labor thus produces 2 × 20.13 = €40.26 of machine-related and 85 × 0.398 = €33.83 of labor-related overhead — €74.09 together. A flat surcharge would have captured neither figure correctly.
6.3 The six cost components
The MHR is made up of at most six components. Not every one is relevant to every machine — but every potentially relevant one must be checked and either included or deliberately set to zero. Forgotten components are the most common reason for hour rates that are too low.
| # | Component | Formula | Data source |
|---|---|---|---|
| 1 | Imputed depreciation | replacement value / useful lifetech | asset register + price index |
| 2 | Imputed interest | replacement value × i × 0.5 | market rate + risk premium |
| 3 | Energy cost | kW × load factor × h × €/kWh | nameplate + electricity bill |
| 4 | Maintenance | maintenance budget / productive hours | service contract + history |
| 5 | Consumable tools | annual demand / productive hours | purchasing data per cost center |
| 6 | Space cost | m² × rent/m² × 12 / productive hours | layout plan + lease |
It reflects that the tied-up capital declines linearly over the useful life — from the full replacement value at the start to zero at the end. The average capital tied up is therefore replacement value / 2. Calculating without this factor doubles the imputed interest.
Not included: direct labor, indirect wages/salaries (→ residual overhead), material overhead, admin and sales overhead. The MHR is a pure machine-cost rate — the center's labor cost runs separately through the residual overhead surcharge (Chapter 7).
6.4 Replacement value as the assessment base
Imputed depreciation is not based on the historical purchase price but on the replacement value — the price an equivalent machine would cost today. This is the single most consequential error in practice.
The reason is simple: costing should enable the company to replace the machine at the end of its useful life. Depreciate against a 2018 purchase price and by 2032 you have collected an amount that no longer buys a comparable machine in 2032. The gap only shows up at reinvestment — by which point it can no longer be closed.
Alternatives when no index is available:
flat 3–5 % per year since acquisition · manufacturer quote for list price
For machinery and equipment, the German Federal Statistical Office publishes producer price indices under commodity class GP09-284 (metalworking machinery). The series are freely available. What matters is less the decimal place than the consistency: the same index must be used for all assets and across all years, otherwise the hour rates are not comparable with one another.
6.5 Technical rather than tax useful life
The tax authority's depreciation tables serve tax profit determination, not costing. For cost accounting, what counts is how long the machine is actually economically usable — and that depends above all on the shift model.
| Shift model | typical technical useful life | Reason |
|---|---|---|
| Single shift | 14–16 years | low running hours, ageing dominates |
| Two-shift | 12–14 years | the standard case in machining |
| Three-shift | 9–11 years | wear dominates, maintenance intensity rises |
Anyone using the tax useful life in three-shift operation makes two errors at once: the machine lasts a shorter time than assumed, and the depreciation spreads over more hours. Both effects run in the same direction — the hour rate comes out doubly too low. The calculation is in Chapter 8, error #03.
6.6 Benchmark values for a plausibility check
A calculated hour rate should always be checked against experience values. Not to adjust it — but to find calculation errors. If the result deviates strongly, usually a component is forgotten or the capacity is set wrong.
| Machine type | replacement value range | typical MHR | Note |
|---|---|---|---|
| CNC turning center (single shift) | €150–400k | €18–35/h | depends on specification and automation level |
| CNC 3-axis milling center | €200–500k | €22–45/h | bed vs. gantry mill with large replacement-value effect |
| 5-axis machining center | €350–900k | €35–75/h | high depreciation, high energy cost |
| Die-casting machine (aluminium) | €400–1,200k | €45–90/h | mold cost calculated separately as special direct cost |
| Plastic injection molding | €150–600k | €20–55/h | mold cost as special direct cost; high energy use |
| CNC press brake | €100–300k | €15–28/h | lower tool wear than machining |
| Laser cutting system | €300–800k | €35–65/h | gas, nozzles and lenses as tooling cost |
| Welding robot | €200–500k | €25–50/h | welding wire, shielding gas recorded separately |
| Manual assembly station | €5–20k | — | no MHR → overhead surcharge on direct labor |
If your calculated MHR is well below the lower benchmark, first check the replacement-value base (historical acquisition cost instead of replacement value?) and whether a component is missing. If it is well above the upper value, check the capacity — usually too few productive hours are set, so the fixed costs spread over too few hours.
Chapter 7 turns these fundamentals into a complete calculation: five steps from the asset value through the productive hours to the finished rate of €46.37/MH — with a sensitivity analysis and the transition to the full hour rate.
