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Explain the concept of machine hour rate depreciation method.
Machine hour rate is called as service hour method. In this method, active hours of machine are taken into account for calculation of depreciation. This method is commonly used in sectors like chemicals, steel and other heavy industries.
In this method, machine hour rate is established and charged to production. Machine hour rate means the amount spent on machine to run for an hour.
Formula
(Depreciation rate) hourly = (Cm-SVm)/ELm Here Cm = cost of machine, SVm = scrape value of machine and Elm = estimate life of machine (Depreciation)Annual = WHm * (Depreciation rate) Hourly Here WHm = hours of work of a machine in a year
Types of machine hour rate are as follows −
Simple − Expenses that are connected directly to operation of machine.
Composite − Expenses includes machine hour rate, standard charges, fixed charges and direct wages of machine per hour
Advantages of machine hour rate depreciation method are as follows −
- Scientific and practical method.
- Time factor is considered.
- Useful data is provided.
- Helps in decision making.
- Skilled and unskilled can be differentiated.
- Efficiency and operating cost can be compared.
- Idle time of machine can be known.
- Ideal method for machines.
- Reports made out of this are dependable.
Disadvantages of machine hour rate depreciation method are as follows −
- Additional work is carried out in calculation of working hours.
- Expenses are not considered.
- Results can be inaccurate if, both machine and manpower are required.
- Estimation of working hours is difficult.
- If manpower requirement is more than machine then, this method is not suitable.
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