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9–10 Review Material Scrap Levels
For example, this can happen when the same product is issued in 10 different col-
ors, resulting in a report with 10 line items—one for each product variation. In
this instance, it is useful to cluster product groups together into a single line item
for each group, resulting in a much shorter and more readable report. All or some
of these reporting variations can give management a better idea of the cost trends
to which their products are subject.
Cost: Installation time:

9–10 REVIEW MATERIAL SCRAP LEVELS

There are a number of ways to tell if a production process is not operating as effi-
ciently as it could. For example, labor hours are higher than expected, material
usage exceeds the standard, or delivery times are chronically late. However, the
accounting department does not do well in reporting on late deliveries, since this
does not involve the database of financial information that the accounting staff
normally accesses. Also, the direct labor pool tends to be relatively fixed in the
short term, and so is surprisingly difficult to reduce. Thus, accounting reports
showing excessive labor may not result in an immediate impact on this area.
However, reporting on material scrap rates is well worth the effort. The reason is
that a high scrap rate is the primary indicator of a host of potential problems in
the production process. For example, scrap can be caused by poor operator train-
ing, bad machine maintenance, an excessive level of work-in-process inventory,
and design flaws. By using material scrap as the prime indicator of problems in
the production process, management can further refine the reasons for it, target
those problems, and eliminate them.
The problem for the accounting department is how to issue a valid material
scrap rate report. If the report is inaccurate, management will not believe the num-
bers and will not use the information to improve the production process. It is vital to
derive the most accurate information possible from the evidence at hand. There are a
variety of scrap reporting methods available, noted in the following bullet points:

• Weigh the scrap. The simplest method for determining the amount of scrap is
to put it in a pile and weigh it. This is a practical approach if a company can
recycle the bulk of its scrap and therefore keeps it in recycling bins. One can
then weigh the bins and multiply the weight by the average cost of the scrap
to determine a total scrap cost.
• Summarize receipts from scrap purchasers. An even easier approach is to let
the scrap purchaser weigh the scrap bin and use this information to derive the
total cost of the scrap.
• Compare standard to actual material usage. The approach that results in the
most detailed information about exactly which material has been scrapped is