Options for Valuing Scrap and Reporting Variances

Within MAC-PAC, there are two ways to report scrap:

·      Component scrap.  When a component is scrapped, the scrap is valued using the total cost of that component, which is obtained from the Part Master File of the component.  An item should be scrapped at the component level if you discover at the beginning of the manufacturing process that it cannot be used.  Since no work has been expended on that item, no labor or overhead costs from the routing are included in the cost.  The reported scrap is posted to a scrap expense account in the period when the material was scrapped.  A separate account may be defined for each department, based on the operation where the component was scrapped.

·      Parent scrap.  When an item is scrapped at the parent level, some work has been performed on that item.  As a result, the scrap quantity is valued using the material cost of all components of the item plus any labor and overhead costs incurred to date.  Miscellaneous costs incurred in operations preceding the scrap operation are not included in the parent scrap valuation.  The material cost is determined from the component requirements.  The labor and overhead costs are determined using the standard labor and overhead costs (from the workcenter master) for each operation that has been completed on the scrapped material.  This approach provides progressive costing of labor and overhead.  The reported scrap is posted to a scrap expense account in the period when the material was scrapped.  This option has the advantage of removing labor and overhead costs related to scrap from work in process when they occur, as opposed to waiting until the manufacturing order is complete.  A separate account may be defined for each department, based on the operation where the material was scrapped.

Both of these methods calculate material costs based on the manufacturing order's component requirements.  The component requirements contain information about the material actually used in the manufacturing process.  This material will differ from the items specified in the bill of material if substitute components have been used.  Because the standard cost used to value the finished goods inventory is based on the bill of material, an engineering variance is calculated to account for any cost differences associated with using the substitute component.  This variance is calculated after the manufacturing order is closed by comparing the total material cost on the component requirements with the material cost from the parent's bill of material.  It identifies places where components of different value were substituted for the items specified on the bill of material.  The calculation of the engineering variance will not differ with the different methods of accounting for scrap.

System Options

MAC-PAC provides three options for recording scrap and calculating variances.  You must specify which of these options will be used for each item on the item's Part Master File record.

·      No Scrap Accounting.  The scrap reported in the Shop Floor Control module has no effect on the general ledger accounts.  When a manufacturing order is closed, the difference between the actual cost of material issued to the order and the planned material cost from the component requirements is calculated.  This variance is posted to a material performance account.  A single material performance account contains variances for all departments.  The labor or overhead expended on the scrapped material is not accounted for separately; it is included in the labor and overhead variances calculated for the manufacturing order.  Note that no material variances are calculated until after the manufacturing order is closed.

·      Accounting for Both Parent and Component Scrap.  The scrap will be valued differently depending on which scrap transaction is used.  Component scrap will be valued at the standard cost of the component, while parent scrap will be valued at the total cost of the component requirements plus any labor and overhead incurred to date.

·      Accounting for Only Parent Scrap.  This option is appropriate for items that use a scrap factor to inflate component requirements.  Because the standard cost of the item has a built-in allowance for scrap, scrapping its components would result in double-counting the scrapped material.  With this option, the cost associated with component scrap will continue to be realized at order closure in the material performance variance.

Key Considerations

In determining which option is most appropriate for a specific item, consider the following:

·      Whether scrap factors are used.  If a scrap factor is used for an item, no scrap accounting or parent-only scrap accounting should be sued for that item.

·      Ability to Distinguish Where a Variance Occurred.  When no scrap accounting is used, only two accounts are used to record material variances:  one for MRP parts and one for JIT parts.  Under either of the other two processing options, a separate scrap expense account may be used for each department where the scrap was reported.

·      Value of WIP.  If scrap is not accounted for, the cost of scrap is not expensed until the manufacturing order is closed.  Under either of the other two processing options, the scrap expense is posted in the same period where the scrap was recorded.