Manufacturing Order Scrap Items
There are various approaches to managing scrap items resulting from manufacturing orders, depending on the industry, the nature of the scrap, and each company’s policies. With Enerpize, you can customize the system to handle scrap items and process them per your accounting requirements. This guide outlines the basics of how the system manages scrap items.
Adding Scrap to Inventory and Selecting in Manufacturing Order
To add a new scrap to your inventory, click “Products & Services” under “Inventory” in the main menu. Then, click the “Add” button and select “New Product” from the dropdown menu.
Enter the name of the scrap item and its selling price if it is resalable. Complete the scrap product details and click the “Save” button.
For more information about the fields for adding a new product, refer to this guide.
If you add scrap materials within the Bill of Materials (BOM), the scrap items will automatically appear in the manufacturing order file associated with this BOM. Their quantity will be adjusted to match the final product quantity specified in the manufacturing order.
However, if you wish to add scrap materials directly from the manufacturing order, navigate to “Manufacturing Orders” under “Manufacturing” in the main menu, select the desired manufacturing order, and go to the Scrap Items section. Add the scrap items generated from this manufacturing order, specify their price, complete the manufacturing order details, and save it.
The price added to the scrap item in the manufacturing order represents the average cost of the scrap (its value). You can sell the scrap at this or a higher price to generate profit. For example, if you set the scrap material price at 30 and sell it for 100, the profit from the scrap will be 70.
In either case, the scrap produced and its cost reduce the cost allocated to the final product, lowering the cost per unit of the final product by an amount equivalent to the value of the scrap generated from the manufacturing order.
For more information about adding a Bill of Materials (BOM) and its fields, refer to this guide.
For more information about manufacturing orders and their fields, refer to this guide.
Scrap materials appear as a separate line item in the cost reports.
To view the scrap details in the report, go to the file of the desired manufacturing order and click on the “Total Cost Report” tab.
Navigate to the Scrap Items section in the report to find a breakdown of all scrap items, including their actual cost, expected cost, and the total cost of all scrap.
Note the following in the previous image:
If the scrap item is added directly to the manufacturing order and is not part of the Bill of Materials (BOM) associated with the manufacturing order, the estimated cost of the scrap will appear as zero. However, the actual cost for the manufacturing order will be displayed.
This is evident in the case of the scrap product “Broken Ceramic.”.
After finishing the manufacturing order, an automatic journal entry is created for the total value of scrap items associated with the manufacturing order.
To view this entry, enter “Journal Entries” under “Accounting” in the main menu, then click on the journal entry for the desired scrap item.
The details of the journal entry are displayed as follows:
This entry is considered an inbound requisition, which reflected on stock transactions. So the quantity of the scrap item increases in the associated warehouse upon finishing the manufacturing order.
Click on “Products and Services” under “Inventory” in the main menu, then select the desired scrap item. You will find the new quantity resulting from the manufacturing order has been added to the specified warehouse.
The scrap can either be a product that you can sell or reuse in the manufacturing process, such as broken ceramic, or completely unusable waste, like toxic waste, which is considered a loss. In some cases, you may have different ways of handling scrap items. Therefore, make sure to configure the system to align with your specific needs.