Machine hour rate method. This is also known as Service Hours Method. This method lakes into account the running time of the asset for the purpose of calculating depreciation. The method is particularly suitable for charging depreciation on plant and machinery, air-crafts, etc. The amount of depreciation is calculated as follows:
Original Cost of the Asset — Scrap Value/ Life of the Asset in hours
For example, if a machine (having a scrap value of Rs 1,000) is purchased for Rs 20,000 and it has an effective life of 10 years of 1,000 hours each, the amount of depreciation per hour will be computed
The method has the advantage of correlating the charge for depreciation, to the actual working time of the machine. However, this method can he used only in case of those assets whose life can be measured in terms of working time.