Scrap Reports

Scrap is defined as the waste that either has no economic value or only the value of its basic material content recoverable through recycling. Scrap also refers to the residue from manufacturing operations that has relatively minor recovery value. While accounting for scrap, the sales value of scrap is treated as an offset to factory overhead. In the manufacturing process, waste and scrap arises due to the processing of materials, defective and broken parts, absolute stock, revisions or abandonment of experimental projects and worn out or absolute machinery.

Scrap reports are prepared on a daily or a weekly basis. The scrap report should account for scrap and then compare it with the predetermined norms or standards which can reveal unexpected items and unusual norms. In cost accounting the scrap is treated in the following manner. If the scrap cost is very low then it’s not necessary to record. The loss is suffered by the product and the earning will arise by selling the scrap and it becoming an income. In case the scrap has some amount which cannot be ignored then the net realizable value of the scrap should be calculated. Finally the total value of the material is deducted from this amount. 

Net realizable value of the scrap= Total sale of scrap - Net sale and distribution expenses of scrap

In the case when the scrap is to be identified with a particular job or process and if it has a significant value then the scrap account should be charged with full cost. Therefore the profit and loss account in scrap account will be transferred to costing profit and loss account.

The proceeds that come from the sale of scrap in reality a reduction in production cost. The Timely scrap reports prepared for each producing department call attention to unexpected items and unusual amounts and should induce prompt corrective actions.

Questions

• What is a scrap report?
• How is the scrap treated in cost accounting?