Dealing with Scrap in QuickBooks Manufacturing

| February 9, 2010 | 4 Comments

Many manufacturers have to deal with scrap in their manufacturing process. That is, the consumption of component materials beyond what is defined in the bill of materials due to waste, trimmings, left over sections or other variable consumptions. QuickBooks doesn’t deal with this directly. Let’s talk about some ways to handle it.

Scrap is a term that I’m using loosely to refer to consumption beyond what you normally define as going into the assembly. If you are cutting shapes out of some sheet metal, or a piece of cloth, you may have extra material from around that shape that is wasted. If you are using electronic components you may find that when you test the parts some have to be tossed out because they don’t meet specifications. Things of that sort.

There are many different ways of dealing with this. Some are more accurate than others, but take more work. You have to decide how important tracking these costs are for your business, versus the effort it takes to do the tracking. I’ll throw out a few suggestions – there are probably many others than what I offer here.

This article was updatd on 2/10/2010

Ignore It

This is the simplest way – just ignore the issue! I don’t usually recommend this, but sometimes it makes sense. If you have small washers that you are using, and the washers are fractions of a penny each, it probably isn’t cost effective to keep track of how many you drop when you are building your assembly. This option applies if you have an inexpensive item that you may be expensing already (a non-inventory item), and the waste/scrap amounts are very small.

Physical Inventory Counts

Another simple approach that may work for you, depending on how you manage inventory. Don’t worry about actually tracking what you are scrapping as you go along, count your items periodically and make adjustments. If you are using inventory part items, you know how many you should have used in a period of time. Count how many you have at the end of that time and compare it to what QuickBooks says you have. If you have less, then use an inventory quantity adjustment to bring your quantity to the proper level. You need to select an account to post the value to, and you should talk to your financial advisor as to the best account to use in your situation. I like to use a separate scrap expense account to receive this cost, specifically for counts of items where I expect variations to be due to waste or scrap.

Estimating Scrap in the Bill of Material

In some higher level systems that I’ve worked with (and written) we would have a scrap factor built into the bill of material. In some situations you can make a pretty good estimate (or at least a guess) as to the amount of scrap that you are going to generate with each assembly you build. In these higher level systems you would say, for example, that although I should be using 22 inches of an item to build this assembly, from experience (or measurement over time) I know that it actually will take 24 inches due to various factors. Or, perhaps, from statistical measurements, I know that 15% of my component parts are going to fail a QC check and can’t be used.

These kinds of systems will handle this information in different ways. Some will automatically post that to the scrap expense account. Some will include it in the cost of the finished item, but have it listed as a separate item in manufacturing costing reports.

In QuickBooks there are a couple of ways of doing this.

  1. Just build it in: Enter the full amount plus the estimated scrap into the BOM. Using my example above, tell QuickBooks that you want to use 24 inches, not 22 inches.
  2. Add a separate line: You can add an item to a BOM more than once. Using the example above, I would have one line for 22 inches of the material, and another line for 2 inches of scrap. Due to the way that QuickBooks works there isn’t a lot of value here (it all ends up in the same place) other than having it listed separately in the Bill of Material.
  3. Create a “Scrap” item: I’ve seen this done, I don’t usually like it. Create a special item in the item list for generic scrap (or, specifically scrap for different kinds of parts). This lets you assign a different account to the item. Don’t use this for inventory part items, because it creates a mess (in my opinion) in your quantity on hand. If you use it for a non-inventory item it will let you post to a separate scrap account AND it shows up in the Bill of Material as a separate scrap line that is easier to identify.

The values you are taking into account for scrap here are estimates, and that might be acceptable in some situations. You may couple this with the physical inventory count method. This approach will let you keep a better eye on what you expect scrap to be on an ongoing basis, rather than just when you take a physical count.

Adjust Scrap to Expense

The approaches listed so far work if you have low cost items and tracking your scrap amounts is not a major issue for you. You are going to see scrap numbers periodically, and the figures may just be estimates. This won’t always work for you, particularly if you have a high and variable rate of scrap and there is a lot of cost involved.

If you need better control and reporting of scrap (and you either have a low number of builds or you have expensive materials) then you may want to make the extra effort to make an adjustment after each build.

 image In this sample, I’m adjusting my Cog part down from 10 to 8 parts – I’m scrapping two of them. I’ve selected my manufacturing scrap expense account, just pushing the cost of this item into expense out of inventory assets. Note that this is not a value adjustment.

Again, this might not be the way your financial advisor wants you to handle this. It fits for some situations, but not others.

Adjust Scrap to Asset

This is a variation of the prior method, but this time we are going to move the cost of scrap into the cost of the assembly, rather than expensing it. It has the benefits of moving the cost of your scrap into the value of the assembly, which for expensive items and components may be the right thing to do from an accounting standpoint. Unfortunately, QuickBooks doesn’t make the chore easy.

image This time we are making a value adjustment (see my article on value vs quantity adjustments for an explanation). I’m scrapping two Cog parts as before, and as you can see I’m changing the total value of Cog from $106.70 down to $80.53.

Next, I adjust the value of the assembly item, Z-Gear, to be higher by that same amount. I’m adding $26.17 to its value.

If you are entering one scrap adjustment per adjustment transaction, when you enter the new quantity for Cog then you will see the value of that adjustment in the “Total Value of Adjustment” field at the bottom. This tells you how much you need to add to the Z-Gear value (in this case it is $26.17). If you are entering multiple adjustments to multiple assemblies you have to manuall calculate this value. My thanks to my friend Rustler who pointed out that the value of the adjustment shows in that field when you enter the new quantity for the component item. See his Rustler’s Quickbooks Tips blog, another source of info.

In the screen above I’ve already entered that second adjustment. As you can see at the bottom, the total value of adjustment is zero. That is, I’m transferring the cost out of Cog and into Z-Gear. You need to have an account for any adjustment, and I’ve picked my manufacturing scrap account, but the net change in value is to move the cost from the inventory asset of the scrapped part into the inventory asset of the assembly. No change to that expense account. This will recalculate the average cost of the assembly to add the value of the scrap.

Accurate, and probably the way that the accountants would like (some may argue with me, we’ll see how that goes in comments), but it is a very tedious approach.

I hope to write an add-on program that will make this kind of adjustment much easier, with the computer handling the value calculations for you.

So, there are some ideas. Let me know if you agree, or if you have some alternate methods. There isn’t one way that is right for everyone.

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Category: Inventory, Manufacturing

About the Author (Author Profile)

Charlie Russell is the founder of CCRSoftware. He’s been involved with the small business software industry since the mid 70’s, focusing on inventory and accounting software for small businesses. Charlie is a Certified Advanced QuickBooks ProAdvisor. Look for Charlie’s articles in the Accountex Report blog, as well as his California Wildflower Hikes blog.

Comments (4)

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  1. Derrick says:

    Dear Charlie, i love your website and it helps me alot. Charlie what should i do if i use the scratch to produce other items? do you have any hints on how to handle that?
    Thanks in advance


    • Charlie says:

      Derrick, that depends on how you want to deal with scrap in the first place. QuickBooks doesn’t handle this well. I don’t have a specific answer for this as it would depend on what you are making, what the items are that you are consuming, and how you want to account for things. I’d give a different answer if you are using gold to make jewelry than if you had roll sheet metal stock.

  2. Cary says:

    Charlie, I also have found your website to be so very helpful. Following along with Derrick’s comment, we are a bakery that has begun using scrap from the build batches to make an additional item for sale–trimming cut from cookie bars–sold as “Edges”. It’s a fairly new business, and the process has not included a scrap item in the past. Now I’m trying to figure out how to add these things into inventory–the same build now produces 2 products instead of one. Any suggestions? Thanks, Cary

  3. Charlie says:

    Cary, I’m not an accountant or CPA, so I can’t give you an official way of handling this from an accounting standpoint.

    This isn’t the same kind of “scrap” issue that I’m talking about in the article. A different issue entirely.

    In my mind (unofficially), it seems to me that you have already expensed the materials that went into the whole batch. You’ve already accounted for the cost of the items. How about just creating a non-inventory item and then selling those? You don’t have to worry about the cost, that is already dealt with. Just sell it, this is bonus income.

    The only reason to use an inventory part in this case is if you want to keep track of how much of these “Edges” items you have on hand. In a bakery, I wouldn’t think that you need to track that. But I’m guessing.

    From a numbers standpoint, this would work. From an official accounting and tax standpoint, I’m not qualified to say…

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