Calculating Scrap

Objectives

After completing this lesson, you will be able to:

Explain the different scrap categories
Create a cost estimate containing scrap

Scrap Categories

Planned Scrap Characteristics

The characteristics of planned scrap are as follows:

It is a scrap that is expected when a material is produced.
It normally consists of component scrap and operation scrap.
- Component scrap can be defined in the BOM. It indicates the amount of scrap expected before or during the assembly of a material.
- Operation scrap is defined in the routing. When the routing is executed, the scrap factor is determined from all the operation confirmations and can be written to the material master as assembly scrap.
It is considered unavoidable and is included in the inventory valuation.

Scrap Categories and Their Effects

A chart explaining different scrap categories—Component, Assembly, Operation Scrap with Net Indicator, and Operation Scrap—and their effects on material requirements and planning in manufacturing processes.

Component scrap is used in Material Requirements Planning (MRP) to determine the input quantities of components. When the BOM is exploded, the system increases the input quantities of components by the scrap quantity calculated. For example, if the input quantity is 200 units and component scrap is 10%, the scrap quantity will be 20 units. Therefore, the input quantity required will be 220 units.

Based on the assembly scrap, the system increases the quantity to be produced by the scrap quantity calculated. For example, assume that the quantity to be produced is 200 units. If you specify assembly scrap as 10%, the scrap quantity will be 20 units. This means that the actual quantity produced will be 220 units. The system will accordingly increase the lot size and the quantity of input materials.

If the component scrap is entered in the BOM, the specified value applies. If not, the value in the material master record applies.

Operation scrap is the percentage of scrap that occurs in the operation. The reduction in quantity is taken into account during scheduling and in the cost estimate.

Note

The following table presents the various scrap categories and their effects.

Scrap Categories	Effect of the Scrap Categories
Component scrap identified in the material master	The component requirement is increased by this percentage.
Component scrap identified in the BOM	This overrides the scrap percentage indicated in the component field in the material master. This increases the quantity required of the component as does the material master component field. For example, if the component scrap is 10% and the BOM calls for a quantity of 100, the cost estimate identifies the quantity as 110, which increases the cost to produce the assembly.
Assembly scrap identified in the material master	This increases the lot size by the assembly scrap percentage identified in the material master because the system considers the lot size as the yield and not the starting quantity. For example, if the lot size is 100 and the assembly scrap is 5%, the cost incurred will be for producing 105 units, with an expected yield of 100. Therefore, the costs per unit, which are calculated based on the yield, will increase.
Operation scrap, with the net indicator, identified in the BOM for a component	This overrides the assembly scrap percentage for the specific component. It is useful when a component can be saved and reused, even if the assembly does not pass inspection. For example, while the assembly scrap may be identified as 5%, the operation scrap for a specific component may be identified as 1%. Therefore, all other component requirements will be increased by 5% with an exception of the component with the operation scrap as 1%.
Operation scrap identified in the routing	This indicates that there is a scrap loss in a specific operation. The remaining operations are processed excluding this loss percentage. For example, if there is a scrap loss of 10% for a lot of 100 pieces in operation 20, the system calculates the remaining execution time for the successive operations for 90 pieces, not 100.

Scrap Calculation

Note

In the itemization report, the system displays planned scrap separately, which enables you to know how much of the planned costs result from planned scrap. It is better to check this before releasing standards to ensure that the figure is realistic.

A diagram illustrating how operation scrap influences assembly scrap calculation in production, showing the formula involving operation scrap factors for different operations.

Differences Between Planned Assembly Scrap and Operation Scrap

Planned Assembly and Operation Scrap

Planned Assembly Scrap	Planned Operation Scrap
Percentage of an assembly that does not meet the quality standard.	Percentage of a material processed in an operation that does not meet the quality standard.
For example, if the assembly scrap is 25% and the required yield is 100 units, production must start with 125 units.	For example, if the operation quantity is 125 units and the operations scrap is 20%, there is a loss of 20% (25 units).

It is important to understand the difference between assembly scrap and operation scrap. Operation scrap refers to the losses that occur at individual work levels. Assembly scrap is required in MRP to increase the starting quantity so that the output is the required yield despite the losses resulting from the substandard assemblies.

Assembly Scrap Update

The image illustrates a process diagram showing the scheduling and updating of a material master with routing operations.

There is only one field in the material master for assembly scrap. You choose a routing through which you will update the value in the assembly scrap field.

Note

It is possible to have the system update the assembly scrap field in the material master based on the scrap that is reported through confirmations.

Planned Scrap in the Itemization

The image displays a table of planned scrap costs for different resources, highlighting scrap quantity and value in itemization only.

Scrap in Detail

The image illustrates the process of producing 1 kg of washing powder using 1 kg of powder and 1 g of scent through mixing and drying operations in a world without scrap.

Itemization Without Scrap

A table detailing the itemization of washing powder production without scrap, listing operations, resources, quantities, prices, and total values for a standard price of 40/kg.

Assuming that each item costs exactly 10 per part, it would cost 40 to produce 1 kg of washing powder.

Component Scrap

Itemization with Component Scrap

Note

The first type of scrap in the example is component scrap, which causes additional quantities of materials to be consumed but does not affect work resources.

In the example, planned component scrap is 10% for the washing powder. You need the following resources to produce 1 kg of washing powder:

1.1 kg powder

1 g scent

1 h mixing

1 h drying

Each item costs 10 per part. This means that 1.1 units of powder will be consumed, which would incur a cost of 11 for the powder, raising the cost of washing powder to 41 per kg.

Assembly and Operation Scrap in the Routing

The image depicts the production of washing powder highlighting the components and operations involved, illustrating a scenario where 1.25 kg of powder and 1.25 g of scent are used, subjected to 20% operation scrap and 25% assembly scrap, resulting in a final product output of 1 kg.

Itemization with Assembly and Operation Scrap

A table showing the itemization of washing powder production with assembly and operation scrap factors, adjusting resource quantities, total values, and scrap costs for a standard price of 47.5/kg.

Note

Consider two types of scrap, assembly scrap and operation scrap, in the process. Component scrap is not included in the example.

Assembly scrap affects all the components and the work resources. You need to produce 25% more washing powder to yield the required 1 kg. This means that you need to consume 125% of all resources, both material and work.

Operation scrap represents a calculation for determining the loss in the yield. The operation in this example results in a loss of 20% of the product; any subsequent operation needs to process only the remaining quantity.

Let’s say in the example, there is 25% assembly scrap. This implies that you need 125% of the raw materials, which are priced at 10 per unit.

1.25 kg powder * 10/1 = 12.5

1.25 g scent * 10/1 = 12.5

All 125% of the material passes to the first operation, mixing, where there is 20% loss after completing the operation. This means that only 1.25 minus 20% or 1.25-(1.25 * 0.20) = 1.0 goes through the drying operation with the following results:

1.25 h mixing * 10/1 = 12.5

1 h drying * 10/1 = 10

The cost of 1 kg of washing powder changes to 12.5 + 12.5 + 12.5 + 10 = 47.5/kg washing powder.

This example illustrates that combining operation scrap with assembly scrap is only worthwhile if the scrap occurs before the final operation. If you had not used operation scrap, you would have consumed 125% of the drying operation and the cost per unit would have increased to 50/kg washing powder.

Assembly and Operation Scrap in the Routing and BOM

The image demonstrates the production of 1 kg of washing powder accounting for 20% operation scrap in BOM, with increased quantities and time for powder mixing and drying, and indicates that assembly scrap is excluded from operation scrap calculations.

Itemization with Assembly and Operation Scrap in the Routing and BOM

The image shows itemization for producing 1 kg of washing powder, including operation quantities and prices with associated scrapping values, totaling a standard price of 44.5 per kg.

Note

When you use the operation scrap field in the BOM with the net indicator, this overrides the assembly scrap percentage for the specific components. In this example, the operation scrap with net indicator is 20%. The scent has the net indicator 0%. There is effectively no scrap for this component. In this example, only the mixing time is affected by the assembly scrap percentage of 25%.

The breakdown is as follows:

Powder: 1 kg * 1.20%= 1.2 * 10/kg=12.0

Scent: 1 kg * 1.00% = 1 * 10/kg=10

Mixing: 1 h * 1.25%= 1.25 * 10/h=12.5

Drying: 1 h * (1.25-(1.25 * 0.2)) =1 * 10/h= 10

Cost of the washing powder is 44.5/kg.

The Net Scrap Indicator

If the net scrap indicator is turned on, the scrap of the component is calculated based on the net input quantity of the assembly, which is the input quantity without assembly scrap from the material master.

The procedure with the net scrap indicator is as follows:

Turn on the net scrap indicator to exclude the assembly scrap.
If you enter the operation scrap, turn on this indicator.
If you make only one entry for the component scrap, set the indicator so that the system calculates scrap based on the net input quantity of the assembly.

Scrap Example

The image compares costing structures with no scrap, 10% component scrap in BOM, 10% assembly scrap in MM, and both operation net scrap and operation scrap at 10% in BOM and RTG.

The following is displayed in the figure above:

The lot size for the Forklift is 100.
The scrap %'s were input on the Drive Assembly.
The Component scrap increased the cost and also increased the Drive Assembly quantity to 110.
The Assembly scrap increased the cost.
The Operation Net scrap increased the cost and also increased the Drive Assembly quantity to 110.
The Operation scrap reduced the Forklift quantity to 90. The total cost went down as a consequence. The cost per unit in this case if 44,390.

Create a Cost Estimate with Scrap

ExerciseStart Exercise

Summary

Understand various scrap categories and their impact on material and production costs.
Learn to calculate scrap and incorporate it into cost estimates to avoid unexpected variances.
Recognize planned scrap as an unavoidable loss, included in inventory valuation.
Differentiate between component, assembly, and operation scrap, and their effects on production planning.
Utilize scrap fields in BOM and routing to adjust input quantities and production lot sizes.

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