Meaning
Accounting method for distributing the capital cost of a molding machine over its productive lifespan. In commercial molding, machine hour amortisation allows a company to include the equipment cost in the price of each manufactured part. This calculation ensures that the investment in technology is recovered through sales.
Financial Calculation
Total purchase price and installation costs are divided by the estimated number of operating hours. When machine hour amortisation is calculated accurately, it provides a realistic hourly rate for quoting new projects. This rate must cover both the machine and its auxiliary equipment.
Cost Recovery
High-speed machines often have higher purchase prices but lower cycle times, which changes the machine hour amortisation per part. Managers must balance the cost of new technology against the expected volume of work. Older machines might have zero amortisation but higher maintenance costs.
Proper tracking of these costs prevents the company from underquoting. This recovery allows for the eventual modernization of the factory floor.
Strategic Planning
Factoring machine hour amortisation into the overhead allows for better capital budgeting. As a machine reaches the end of its planned life, the funds recovered through this process can be used for replacement. This ensures the facility remains equipped with modern technology.
