Recognizing Scrap at the Time of Its Production

Our preceding illustrations assume that scrap returned to the storeroom is sold quickly and so is not assigned an inventory cost figure. Sometimes, as in the case with edges of molded plastic parts, the value of the scrap is material, and market conditions may cause the time between storing it and selling or reusing it to be long and unpredictable. In these situations, the company assigns an inventory cost to scrap at a conservative estimate of its net realizable value to recognize production costs and related scrap revenues in the same accounting period. If scrap prices are volatile, as in the case of scrap metal, a “reasonable inventory value” is not easy to determine.

Scrap Attributable to a Specific Job

The journal entry in the Hull example is as follows:

Scrap Common to All Jobs

The journal entry in this case is:

Notice that Materials Control account is debited in place of Cash or Accounts Receivable. When scrap is sold, the journal entry is as follows:

Scrap is sometimes reused as direct material rather than sold. In this case, Materials Control is debited at its estimated net realizable value and then credited when scrap is reused. For example, when scrap is common to all jobs, the entries are as follows:

When scrap is reused as direct materials in a process costing system, the accounting is similar to accounting under job costing when scrap is common to all jobs. Why? Because scrap is common to the manufacture of identical or similar units.

Managers are constantly seeking ways to reduce the cost of scrap. For example, General Motors has redesigned its plastic injection molding processes to reduce scrap. General Motors also regrinds and reuses plastic scrap saving direct material costs. Concepts in Action: Google’s Zero Waste to Landfill Initiative shows how a firm deeply committed to principles of environmental sustainability minimizes waste and scrap.