Scrap Accounting in Manufacturing: How to Record Scrap and What It Costs

Scrap accounting in manufacturing records how many units were rejected, at which stage and for what amount. Bimp has no separate scrap module, so scrap is recorded with existing documents: component replacement in a production task, write-off, return to supplier and disassembly.

The example is fictional: a 15-person sheet metal shop makes a batch of 200 steel enclosures and 10 of them are rejected.

Which scrap goes into product cost and which is charged to the period?

Cost accounting splits scrap into normal and abnormal. Normal scrap is unavoidable in the process and stays within a set rate, for example 2% of the batch. Abnormal scrap comes from a mistake, an equipment failure or poor raw material. Normal scrap usually raises the cost of the good units. Abnormal scrap is expensed in the period or recovered from the party at fault, such as a supplier.

That is the general scheme. The allowed rate, the accounts and the treatment are set in your accounting policy under the local accounting standards, and your accountant confirms the posting. The 2% rate in the example is chosen for the arithmetic.

How much does scrap cost when you count it by stage?

The enclosure passes three stages. Direct cost per unit builds up at every stage.

Defects were found at two stages. Six enclosures were rejected after welding and four after painting. The metal from the scrapped units was sold as scrap for €40.

Scrap metal brings back €40, so the net loss is 928 − 40 = €888, or €88.80 per rejected enclosure on average. Scrap is 10 / 200 = 5% of the batch. Total batch cost is 190 × 100 + 928 = €19,928, and the net loss is about 4.5% of it.

The stage-by-stage view explains why scrap is costed where it was found. An enclosure costs €70 after cutting and €100 after painting, which is 43% more. If the six enclosures had been rejected at cutting, they would have cost 6 × 70 = €420 instead of €528, which is €108 less.

How does scrap change the cost of good units?

There are 190 good units, and their cost depends on where the scrap is booked. For simplicity, normal scrap is valued at the average cost of a rejected enclosure, €88.80.

By the bill of materials an enclosure costs €100. If all scrap lands on the good units, the batch cost is 190 × 100 + 888 = €19,888, or 19,888 / 190 = €104.67 per unit. If only normal scrap goes into cost, take the 2% rate on 200 units, which is 4 enclosures, 4 × 88.80 = €355.20. The other 6 enclosures, 6 × 88.80 = €532.80, go to period expense. The cost of good units is then (19,000 + 355.20) / 190 = €101.87 per unit.

The selling price is €130 per enclosure and revenue is 190 × 130 = €24,700.

In the second and third rows the total result is the same. In the third row 5,344.80 − 532.80 = €4,812, as in the second. Only the view of the product differs. In the second scenario a unit costs €2.80 more (532.80 / 190) than in the third, where that part shows up as a separate expense line.

How do you set the normal scrap rate?

The rate usually comes from the statistics of your own batches. Over six batches of enclosures the scrap share was 1.5%, 2.5%, 2%, 1.8%, 2.2% and 2%. The average is (1.5 + 2.5 + 2 + 1.8 + 2.2 + 2) / 6 = 12 / 6 = 2.0%. This value becomes the rate in the example.

A batch with 5% scrap exceeds the rate 2.5 times. The 3 percentage points of difference equal 3% of 200 = 6 enclosures, which fall into abnormal scrap. The process engineer reviews the rate when the metal, the equipment or the painting process changes.

How many units survive each stage?

A total of 5% hides where the loss happens, so scrap is calculated by stage.

190 of 200 units make it to the end, which is 95%. Welding rejected more units and a higher percentage, and its total loss is also larger, €528 against €400 at painting. A painting reject is more expensive per unit, €100 against €88. For cutting losses, welding is therefore the first place to check.

Is it cheaper to rework a unit or to scrap it?

Part of the scrap can be reworked. Suppose a weld defect is re-welded for €9 of labor per enclosure. For six enclosures that is 6 × 9 = €54. Scrapping the same six costs 528 − 24 = €504 of net loss. Rework saves 504 − 54 = €450, provided the enclosures pass inspection afterwards.

In the cost calculation this labor adds to the cost of the reworked units. Check also that the €9 does not exceed the gap between the product price and the cost of scrap at that stage.

Which Bimp documents fit scrap accounting?

Scrap at an assembly operation is recorded in the production task. In the “Components” table at the bottom, the “Replacements count” column opens the “Component” side panel. There the Repair button adds a row with the “Replacement component”, the quantity and the reversal date, plus a status, a responsible person and the “Repair cost”. The new part is written off from the warehouse, the defective one returns to stock at its original cost price, and the repair creates “Piecework pay” that is added to the cost price of the product. Details are in Replacing a component in a production task.

Two consequences matter. The defective part returned to stock at full value, so the loss is not yet recognized. The loss appears when the part is written off or returned to the supplier. For example, a €13 power supply is replaced with a new one at €13 and the repair costs €2. The product cost keeps the new part and the €2 of repair, while the €13 defective part waits in the warehouse.

To write off scrap, use Warehouse → Write-off. Choose an expense item (the default is “Write-off”), add goods with the warehouse and quantity, and the cost price is taken from the product card. If the scrap relates to a specific customer order or work order, set the “Operation type” to “Cost price”, choose an item from the “Cost price expenses” group and specify the order. The scrap cost then lands in the “Gross profit” of that order and shows by document date in the “Income and expenses” report. See Write-off and Write-off to cost price.

Defective material from a supplier goes back with a “Return to supplier” document. You create it based on the goods receipt, and it writes goods off the warehouse and adjusts the debt. A refund is recorded with a separate document. A rejected product that can be taken apart is handled with “Disassembly”: Bimp writes off the product and posts the parts, allocating cost by “Cost share” values that add up to 1. See Return to supplier and Disassembly.

Material norms and overuse are controlled with consumption limits. In the specification you set “Minimum quantity” and “Maximum quantity”, and the assembly blocks saving when quantities fall outside them. If the deviation comes from fixing scrap, an administrator or the account owner can confirm it, and the actual quantity is written off. Saves with deviations are recorded in the “Change history” (see Material consumption limits). These overruns go into the cost of good units, as in the second scenario above.

What does a scrap log look like for the cost accountant?

Bimp has no report of scrap by stage, so the cost accountant keeps a sheet per batch.

In the example, the scrap value of six enclosures was €24 out of €40 for the batch (€4 per enclosure). The “Stock movement” report adds the overall picture of write-offs, including how much went to scrap.

What does scrap from a supplier cost?

Raw material scrap is found at incoming inspection, before the material goes to the shop. Suppose the shop received 40 metal sheets at €300, €12,000 in total, and 4 sheets turned out defective. The return to the supplier is 4 × 300 = €1,200, and the debt to the supplier falls to 12,000 − 1,200 = €10,800. If the supplier refunds cash, that is recorded with a separate document.

This scrap does not enter the cost of enclosures and is not written off to shop expenses. If the sheet defect appears after cutting, the situation differs. The metal has become parts, part of the value sits in labor, and the claim on the supplier covers only part of the amount. The cost of such scrap is calculated as in the example above, and the part the supplier compensates is subtracted from the loss.

What does Bimp do and what does it leave out?

Bimp is a Ukrainian cloud ERP for manufacturers. It writes off the new part, returns the defective one to stock, adds the repair cost to the product cost, handles write-offs with an expense item and returns rejected goods to the supplier. The “Accumulated cost”, “Cost of produced goods” and “Gross profit” reports show the result.

Bimp has no separate scrap module, no scrap act, no scrap percentage by stage and no split into normal and abnormal scrap. The normal scrap rate, the split between product cost and period expense, and the accounting policy are decided by the cost accountant together with the chief accountant. The stages at which Bimp calculates accumulated cost are described by the specification and the production task. For the broader picture of cost, see the manufacturing cost calculation guide and the Bimp home page.

What did the calculation show for a batch of 200 enclosures?

The ten rejected enclosures cost €888 after scrap sales. In the third scenario €532.80 of that amount stays outside the unit cost, and in the second scenario all scrap adds €4.67 to every good enclosure. If the six enclosures had been rejected at cutting, the batch would have lost €108 less.

FAQ