Reviewed November 2026. Formulas are shown above the guide. Report an error or request a calculator.
What the machine hour rate is for
Job shops quote work in machine hours. If the hourly rate is too low, every job loses a little money and nobody notices until the year-end figures arrive. If it is too high, you lose quotes you could have won. The machine hour rate collects every cost of owning and running a machine and divides it by the hours it actually runs.
It is also the right number for make-or-buy decisions: compare it, plus operator and material, with the subcontractor's price.
Worked example
The default values describe a $250,000 machining centre with a $25,000 residual value after 10 years, running two 8-hour shifts on 250 days at 75% utilisation.
| Item | Per year |
|---|---|
| Running hours (8 × 2 × 250 × 75%) | 3,000 h |
| Depreciation (225,000 ÷ 10) | $22,500 |
| Interest on average capital (6%) | $8,250 |
| Floor space (20 m² × $120) | $2,400 |
| Maintenance | $6,000 |
| Fixed cost per hour (39,150 ÷ 3,000) | $13.05 |
| Energy per hour (15 kW × 60% × $0.18) | $1.62 |
| Machine rate | $14.67 / h |
Adding a burdened operator cost of $38 an hour gives $52.67 an hour for quoting.
What to leave out
- Tooling and consumables that vary strongly by job are better charged to the job directly.
- General overhead such as office staff and sales is usually added as a separate overhead rate on top of the machine rate.
- Interest is included because money tied up in the machine could earn a return elsewhere. Some companies leave it out; be consistent across machines.
Frequently asked questions
How do I calculate machine hour rate?
Add yearly depreciation, interest on capital, floor space and maintenance, divide by running hours, then add energy cost per hour. Add the operator's burdened hourly cost if you quote labour and machine together.
Should I use available hours or running hours?
Running hours. Dividing by available hours makes the rate look cheaper than it is because the machine does not earn during idle time.
What utilisation should I assume?
Use your own history. Job shops often run 50–75% of scheduled time; dedicated production cells can exceed 85%.
Why is interest on average capital (price + residual) ÷ 2?
The capital tied up falls from the full price to the residual value over the machine's life, so the average is the midpoint.