Scrap Inventory is the amount of material leftover during the production process and it is not good enough for further production. Its value is very low compare to the main material and it can be ignored.
Most of the companies sell scrap inventory without any future work. If the scrap requires further work, it should be considered as a joint product. Moreover, the scrap inventory supposed to be the input for another business that manufacturing the other finished product. It should not be the finished product otherwise it cannot be classified as scrap.
Reasons for Scrap Inventory
Scrap Inventory is very normal for manufacturing as we could not achieve 100% efficiency. There must be some leftover material that cannot be put back into production. However, the scrap percentage should be consistent from one to another period. If they increase more significantly, there must be something behind.
|Machine Breakdown||The material stuck during the machine breakdown will be damaged and not meet the standard quality. The more machine breakdown, the more scrap it will be made.|
|Low-Quality Material||Low-quality input will generate a significantly huge amount of scrap. It will be hard for workers to work with them as the quality is not meet the standard.|
|Ineffective Work Process||Some working processes are poorly designed which not fit with the production. It will cause higher scrap than it should be.|
Accounting for Scrap Inventory
- The scrap is significant and can be identified
If the scrap value is huge, we have to exclude it from the COGS and record it in the scrap material account (sub-account of inventory). When they are sold, they should be reclassed to other costs of goods sold which are separated from normal COGS. It will allow the management to monitor them on a monthly or yearly basis. If the scrap inventory increase significantly, management will be able to take action on time.
- The scrap is insignificant and hard to identify, the company can deduct it directly from the overhead cost when the scrap inventories are sold.
Scrap Inventory Vs Spoil Product
Scrap is not the finished product, it still raw material but we cannot use in the current production process. They may fit with other production processes or use for different purposes.
Spoil product is the finished product, but it is not meet the standard quality check. It could be a design defect or process defect. The company may dispose the spoiled product to prevent any reputation damage.