How do I work out a machine's hour rate from salaries, depreciation and power?

2026-11-06 | Intagya ERP

The production engineer's pricing file has a box called furnace hour rate, and it says 900. Who wrote that? Nobody remembers. Does it include power after the last tariff rise? Nobody knows.

Yet that figure goes into every quotation that leaves the factory.

What goes into a machine's hour rate?

Four parts, each with a source in the accounts:

• Salaries: the wages of the people who run the line or machine, from the payroll entries.
• Depreciation: the machine's monthly depreciation, from the Assets app.
• Power and running costs: meter bills and what is spent to keep the machine running.
• Factory overheads: its share of rent, water and supervision, spread by hours worked.

Add up what was spent on each part in the month and divide by the hours actually worked. What you get is a real hour rate, not a number in a file.

How do I work out the salary part of the rate?

Take the crew's actual salaries and divide by the line's working hours. A made-up example from sample data: a rolling line run by four people, 39,000 in salaries for the month, 206.8 hours worked. The salary part is about 188.6 an hour.

In Intagya ERP you add the people to the line's Crew field. With Payroll installed, their salary entries are posted on the line's cost centre, so the system reads the figure as it was spent. Before there are payroll entries it starts from the wage on each employee's contract.

Why should machine depreciation be in the hour rate?

Because the machine loses value every month, and that loss is a real cost of every hour it runs. Leave it out and you hand the customer a slice of the machine with every order.

In the Hour rate tab, pick the line's machines from the Assets app under Machines (from the assets). The monthly depreciation goes to the line's cost centre and shows as depreciation per hour. In our example: 18,000 a month over 206.8 hours, about 87 an hour.

How does power get into the rate when not every machine has a meter?

A machine with its own meter takes its whole meter bill: tick Own electricity meter and post the bill on the line's cost centre. Machines sharing the factory meter have their power counted as a factory overhead, spread by hours.

That is not perfectly precise, but it is honest: it does not pretend the furnace and the packing table use the same power, and it does not ignore power altogether. Until the first month with real bills is closed, you type an estimated running cost per hour, used only until real figures arrive.

Why does the hour rate change from month to month?

Because spending changes and hours change. In a slow month the machine runs fewer hours, so each hour carries more depreciation and rent. That is useful information, not a bug: an idle machine costs you while it stands.

Before the close the system uses an estimate from the last closed month, and Rate source says where the figure comes from. At the close it puts the actual rate on every order of the month.

The list shows the whole gap. In our example the rolling line was typed in at 1,400 an hour; its real rate is 784. Quality and packing was 300; its real rate is 441. The first was pushing quotations so high that customers went elsewhere. The second was losing money quietly.

Start with the line you think you know best. If its real rate is far from your figure, the other lines deserve a look too.

Where is the hour rate used once it is worked out?

Everywhere the hand-typed rate used to be. The line's hour cost is kept equal to the real rate, so it goes into the cost of every manufacturing order and into the cost sheet the design team builds before quoting a new order.

How do I price a one-off order before quoting?

The Real cost tab of a manufacturing order shows each line's work with its hours, salaries, depreciation, running costs and overheads, then the profit. That is where you see which products earn and which lose.

Am I selling a product at a loss without knowing it?

Tomorrow, take one line: add its crew, pick its machines from the assets, tick the meter if it has its own, and press Compute the hour rate. Then compare the figure with the one you used to type. The steps, with pictures, are in the user guide.

Real production cost, step by step