How to calculate the machine hour rate
The machine hour rate takes everything a machine costs in a year and divides it by the hours it actually runs. Some costs are already hourly (energy, consumables) and go straight in.
Machine hour rate = depreciation + capital + maintenance + energy + floor space + consumables (all per hour)
| Item | Formula (per hour) |
|---|---|
| Depreciation | (machine price − residual value) ÷ (useful life in years × hours per year) |
| Cost of capital | (price + residual) ÷ 2 × interest rate ÷ hours per year |
| Maintenance | maintenance per year ÷ hours per year |
| Energy | rated power (kW) × load factor × electricity rate ($/kWh) |
| Floor space | area (ft²) × cost per ft² per month × 12 ÷ hours per year |
| Consumables | tooling, inserts, coolant and so on, already in $/h |
The cost of capital is what the money sunk in the machine would earn elsewhere. The rate applies to the average invested capital, (price + residual) ÷ 2, because the machine loses value over its life: it starts at the purchase price and ends at the residual value.
The operator stays out of the main total. The calculator shows the rate without and with the operator (wage plus benefits and payroll taxes per hour), because one operator may run several machines and every shop quotes that differently.
How to calculate the cost of downtime
An hour of downtime costs what you fail to earn plus what you pay for nothing:
Cost per downtime hour = lost margin + idle labor + fixed cost (optional)
Lost margin = units per hour × contribution margin per unit
Idle labor = people idled × cost per person per hour
Lost margin only applies when the output is gone for good: the customer bought elsewhere, the order slipped and was cancelled, or the line already runs flat out. If the lost output is made up with overtime, no sale is lost. The cost becomes the overtime premium (people × hourly cost × premium, say 50%), on top of the labor that stood idle. Pick the case in the “Output lost during the stop” field.
Then multiply:
Cost per month = cost per downtime hour × downtime hours per month
Cost per minute = cost per downtime hour ÷ 60
Worked example
The values preloaded in the calculator describe a CNC lathe running two shifts.
Machine hour rate. A $250,000 machine with a $50,000 residual value, a 10 year life and 4,000 hours a year (250 days × 16 h):
- Depreciation = (250,000 − 50,000) ÷ (10 × 4,000) = $5.00/h
- Average capital = (250,000 + 50,000) ÷ 2 = $150,000. Cost of capital = 150,000 × 8% ÷ 4,000 = $3.00/h
- Maintenance = 10,000 ÷ 4,000 = $2.50/h
- Energy = 15 kW × 60% × $0.12 = $1.08/h
- Floor space = 200 ft² × $1.50 × 12 ÷ 4,000 = $0.90/h
- Tooling and consumables = $3.00/h
Machine hour rate = 5.00 + 3.00 + 2.50 + 1.08 + 0.90 + 3.00 = $15.48 per hour without the operator. With an operator at $30/h, $45.48 per hour.
Cost of downtime. The lathe makes 40 units an hour at a contribution margin of $6 each, and 2 people stand idle when it stops, at $30/h each:
- Lost margin = 40 × 6 = $240/h
- Idle labor = 2 × 30 = $60/h
- Cost per downtime hour = 240 + 60 = $300/h, or $5.00 per minute
- With 12 downtime hours a month: 300 × 12 = $3,600 a month and $43,200 a year
If the output were made up with overtime at a 50% premium, the cost would drop to 2 × 30 × 50% + 60 = $90 per downtime hour. Still money, but far less than a lost sale.
How to read the result
- The machine hour rate is for quoting parts (machine time × hourly rate) and comparing processes: CNC or manual, make or buy. Look at which item weighs most: on an expensive machine depreciation and capital dominate, so every extra hour of use per year lowers the rate.
- The downtime cost tells you what each minute saved is worth. At $300 per hour, a $1,000 spare part on the shelf pays for itself the first time it prevents a 4 hour breakdown.
- Combine it with the MTBF and MTTR calculator: downtime hours per month = failures × MTTR. Cutting MTTR by 1 hour with 6 failures a month is worth 6 × 300 = $1,800 a month in the example.
- Downtime also drags down availability and OEE, and takes capacity away from the line: see how much with the production capacity calculator.
Common mistakes
- Dividing by all 8,760 hours in a year. The machine hour rate uses the hours the machine actually runs. On one shift that is about 2,000 hours, and the hourly rate doubles.
- Using revenue instead of margin. A stopped machine does not use material, so only the contribution margin is lost.
- Counting lost margin when the output is recovered. If overtime makes up the parts, no sale was lost. The cost is the overtime premium.
- Adding fixed cost on top of lost margin. Contribution margin is the money that would have paid the fixed costs, so adding both counts the same dollars twice. Use the fixed cost field only for the accounting view, with the margin at zero.
- Forgetting the people around the machine. On a line, one stopped machine starves the stations after it and blocks the ones before. Count everyone left waiting.