Scrap Cost Controls
Jun 19, 2015
On a recent job costing assignment, we were working with a manufacturer which had significant portions of raw material that was unable to be used in the final product. This unused product became scrap, and since there was quite a bit, the scrap factor was very high. As a result, management was very interested in how much scrap was being created because even small improvements in the operation could result in significant reductions in product cost.
The high scrap factor combined with high scrap metal prices made accounting for the scrap very cost effective. In this case, management was interested in all types of controls related to the production of scrap and the accounting for scrap. They hoped these controls would maximize the resale value of scrap being created, as well as, help minimizing scrap being produced in the manufacturing process.
They separated the raw material variances from just cost and efficiency to include a standard scrap allowance. This was measured as frequently as were efficiency variances.They also included a process to precisely weigh scrap at the end of each shift. Prior to this, they had approximated scrap weight at the end of a 24-hour period by simply estimating scrap created and disposed of based on the size of the container and the quantity estimated to be in the container.
As part of the new costs process, they instituted a policy of weighing each container of scrap metal at the end of each shift. This allowed them to precisely correlate scrap produced in relationship to product produced. They were then able to estimate the amount of revenue that would be created by the scale of scrap particularly when scrap metal prices were so high.
The entire goal of this process was to improve overall profitability by directly assigning the responsibility of scrap produced to the shift supervision.
A few years ago, we experienced similar circumstance with a much larger food producing client. In this case, the manufacturer had developed a new process for minimizing waste on raw product entering the manufacturing process. This new proprietary process carried with it the hope of significantly reducing the amount of waste created at the start of the process for this product. Substantial resources were expended developing this new process, so management was interested to learn how much savings were to be created. Waste in this process was always reasonably estimated before, so management imposed new restrictions whereby all waste containers had to be weighed as they were being filled and removed from the production line. As a result, the accuracy of the waste counts improved and clearly pointed out the improvements in minimization of waste by this new scrap or waste processes.
Both of these examples point out the need to constantly improve your accounting. Remember what gets measured must get managed.
Categories: Cost Accounting