Machine Hour Rate Compliance Checklist (GAAP/IFRS/FDA)

Machine Hour Rate (MHR) is a predetermined overhead absorption rate used primarily in process- and equipment-intensive manufacturing (e.g., pharmaceuticals, medical devices, aerospace), where machine usage—not labor—is the dominant driver of indirect costs. Under GAAP (ASC 330) and IFRS (IAS 2), inventory must be valued at the lower of cost or net realizable value, with cost including direct materials, direct labor, and a 'systematic and rational' allocation of manufacturing overhead—including depreciation, maintenance, utilities, and supervision. The MHR must therefore reflect actual capacity utilization, avoid arbitrary allocations, and be updated periodically to maintain reasonableness and consistency. From an FDA perspective—especially under 21 CFR Part 211—the MHR methodology falls under 'adequate controls over manufacturing costs' and supports data integrity in batch records, cost-of-goods-manufactured (COGM) reporting, and quality cost accounting. Regulatory auditors assess whether the MHR is documented, validated, consistently applied across similar assets, and reconciled to actual overhead incurred—failure to do so may trigger observations related to inadequate cost accounting systems or poor internal controls over financial reporting.