Machine Hour Rate Build-Up Worksheet
A machine hour rate tells you what one hour of a machine costs before labor and material. Estimators use it to quote work, and cost accountants use it to set work center rates in the ERP. This worksheet builds the rate line by line so every assumption is visible.
| Machine | Installed cost | Salvage value | Useful life (years) | Productive hours / year (hours) | Average power draw (kW) | Power cost per kWh | Maintenance / year | Floor space cost / year | Tooling and consumables / hour | Depreciation / hour | Machine hour rate | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
$3 | $13 | |||||||||||
$10 | $31 | |||||||||||
$5 | $15 | |||||||||||
$5 | $16 |
Operator labor is excluded so the rate can be used with separate labor rates. Productive hours should be realistic run hours after setup, maintenance and idle time, not calendar hours. Add interest on capital as part of maintenance and space if your policy requires it.
Machine rates from live ERP data
Optional: a short review of how to keep work center rates aligned with actual cost.
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How to use the worksheet
Add one row per machine or work center. Enter installed cost, salvage value, useful life and the productive hours you realistically expect each year. Add average power draw and your electricity price, yearly maintenance and floor space cost, and the hourly cost of tooling and consumables. The sheet calculates depreciation per hour and the total rate. Export to Excel and compare rates across machines before you update work center records.
The formula
Machine hour rate = (cost minus salvage) divided by life divided by productive hours, plus power draw times power price, plus (maintenance plus floor space) divided by productive hours, plus tooling per hour. Straight line depreciation is used for clarity. If your books use accelerated depreciation, many shops still use straight line for costing so rates do not fall as the machine ages.
- Use run hours, not shift hours.
- Average power draw is lower than nameplate kW.
- Include coolant, inserts and wear parts in tooling.
Reading the result
The 5-axis center costs several times the VMC per hour in the example, mainly because of depreciation. If you quote both at the same shop rate, you subsidise one with the other. Compare the computed rate with the rate in your ERP routing. A large gap means either quotes or standard costs are wrong, and it usually shows up as margins that look fine on paper and thin in practice.
Common mistakes
The biggest error is using too many productive hours. A machine that runs 6,000 hours a year on paper often runs 3,000 to 4,000 real cutting hours. The second is leaving out maintenance contracts and controls software. Third, many shops apply one blended rate across all machines. Keep individual rates, then group similar machines into one work center rate if the ERP needs it.
Frequently Asked Questions
What is included in a machine hour rate?
Typically depreciation, power, maintenance, floor space, tooling and consumables, and sometimes interest on capital and insurance. Operator labor and overhead recovery are often handled separately so rates stay comparable across machines.
How many productive hours should I use?
Use actual spindle or run hours you can sustain, usually well below calendar or shift hours. Start from last year's machine monitoring or job report data. Using too many hours understates the rate and leads to underpriced quotes.
Should salvage value be included?
Yes if you expect meaningful resale or trade-in value. Many shops use a conservative figure of 10 to 15 percent of cost for machine tools. Setting it to zero is acceptable and simply makes the rate slightly higher.
How does this relate to my ERP work center rate?
Most ERPs store an hourly run rate or burden rate on the work center or resource. The machine hour rate here can feed the machine component, while labor and general overhead are added by separate rates.
If you want machine rates maintained from ERP asset, maintenance and energy data instead of spreadsheets, Netray can discuss how that could work in your setup.
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