Saurabh wrote to me from India last week with a plea for help on calculating machine hour rates. I replied to the efect that she should go to a factory and ask them all about it since she is doing a Master's degree and should be able to cope with that. She replied: Thanks for sending reply. Firstly i was confused about calculating Machine Hour Rate (MHR) as therotical and practical are different.I have collected information about MHR in local indian books. But when i visited one small scale industry I came to the conclusion that it was different to what was written in books. 1] MHR = FIXED COST + VAR COST. Var.cost includes costs like power, heating etc.S ome authors prefer to add wages but some don't consider it. What is the correct way? 2] while calculating fixed costs, how to calculate building cost? In the Books generally final amount is given. Here's my response: 1 Remember that books often seem to be different to real life because books speak very generally about cost accounting whereas a business is very specific. Another problem is that some practising accountants aren't very sure about their theory and they can make mistakes! Look carefully at what you find and check that it really makes sense. Ask the accountant at the factory to explain why they do what they do. When I do real factory work, this is what I do! Some companies have no proper accountant so they do what they can even if it doesn't always make sense. They NEED an accountant but think they can't afford one. To answer the question of what are fixed and what are variable costs you need to consider the situation you are studying. Again, this is a problem with text books. Many authors simply copy what other authors have written and blindly write the same things without thinking about them. Take a look at my site for examples of fixed and variable costs. If you are not sure about the behaviour of costs in a real business, plot their total costs on a graph with output or sales on the horizontal axis and total costs on the vertical axis and it should give you an idea of fixed costs. If you're not sure about this, collect your data, send it to me and I'll show you what to do. Direct wages were always considered to be variable costs and probably they are on a unit by unit basis. However, many companies then realised that even when output if low, they have the same labour costs as when their output is higher ... their direct labour is partly fixed and they don't even realise it. Ask your company's management what really happens to their labour costs. 2 For this question are you asking what comprises building costs? Building costs are made up of such items as rent, property taxes, repairs and maintenance ... anything that you can directly associate with the building in just the same way as you can associate labour costs with labour and material costs with material. I hope these answer your questions. Let me know of any other problems you think I can help you with. Best wishes DW