A machine-hour is a measurement used to apply factory overhead to manufactured goods. It is most applicable in machine-intensive environments where the amount of time spent in processing by a machine is the largest activity upon which overhead allocations can be based. When there are few machines in production, it is more common for labor hours to be the basis upon which factory overhead is allocated to produced goods.
For example, a widget consumes one hour of machine time. During the month, machines were used for a total of 1,000 hours. In the period, the company incurred $20,000 of factory overhead. Based on this information, the amount of overhead to be allocated to the widget is:
(1 hour used / 1000 Total machine hours) x $20,000 = $20 Allocated overhead