Addendum: Scrap in Product Cost Controlling
The R/3 System supports the following types of scrap:
Assembly scrap
Operation scrap
Component scrap
Example
Planning Scrap for a Finished Product
Assumption
1 kilogram of ROH B and 1 kilogram of ROH C is required to manufacture 1 kilogram of FERT A.
Operation Scrap
You create a routing to manufacture finished product FERT A. The routing consists of operations 10 and 20. You are fairly certain that operation 10 will have 20% scrap. You therefore specify an operation scrap rate of 20% in the routing for operation 10.
If you started with a production lot size of 100 kilograms, and if the operation scrap at operation 10 were 20%, then after operation 10 is completed there would only be 80 kilograms available for the next operation.
To ensure that enough material is available for the next operation, the production lot size for FERT A must be increased.
But since operation 20 also will have a scrap rate of 20%, this scrap rate must be taken into account when the production lot size of operation 10 is increased. You therefore specify an operation scrap rate of 20% for operation 20 as well. You then schedule the routing. When you schedule the routing, the system calculates the assembly scrap and writes it to the material master record.
To calculate the scrap variances, the system compares the target scrap quantities determined on the basis of the operation scrap planned in the routing against the scrap quantities confirmed for each operation. The scrap variances are therefore the quantity of unplanned scrap.
See also:
Assembly Scrap
Assembly scrap increases the production lot size. If you now create a production order and enter a quantity of 100 kilograms, the system increases the production lot size to account for the assembly scrap.
The material master record of FERT A shows an assembly scrap rate of 56.25%. You create a production order for FERT A and enter a total quantity of 100 kilograms. The system automatically increases the total quantity of the production order to 156.25 kilograms.
The assembly scrap also assures that the input quantities of the components and assemblies are increased.
1 kilogram of ROH B and 1 kilogram of ROH C is required to manufacture 1 kilogram of FERT A. If the production lot size increases from 100 kilograms to 156.25 kilograms, the required quantities of ROH B and ROH C also increase to 156.25 kilograms of each. The required quantity resulting from the assembly scrap of FERT A is taken into account in planning. Reservations or purchase requisitions for the raw materials reflect the required quantities of 156 kilograms. If semifinished products are used in a finished product, the calculated requirements for these semifinished products also take into account the assembly scrap of the finished product.
Formula for calculation of the assembly scrap:
Assembly scrap = (1 / (1 - operation scrap op. 10) x (1 - operation scrap op. 20)) - 1
To determine the increase in required quantities due to assembly scrap, the system compares the target input quantities with the actual input quantities. Discrepant input quantities are collected in the variance category input quantity variance.
Component Scrap
Scrap is incurred for raw material B even before it enters the production process. This scrap can be caused by the supplier delivering faulty goods, for example, or by the raw material being damaged during transport or storage such that it can no longer be used. This scrap is entered as component scrap in the BOM or material master record. It, too, increases the required quantities of the input materials.
The assembly scrap of FERT A already increased the required input quantity for ROH B to 156 kilograms. In the BOM of FERT A you also entered a component scrap rate of 10% for raw material B. For raw material B, the requirement therefore increases by 15.6 kilograms to 171.6 kilograms.
When the variances are calculated, the unplanned component scrap is treated as an input quantity variance.
Operation Scrap in the BOM and Net Indicator
The operation scrap in the BOM overrides the assembly scrap in the material master record. If operation scrap has been specified in the BOM and the net indicator is selected, the system ignores the assembly scrap for that BOM item. You must select the net indicator and enter operation scrap in the BOM in the following cases:
The requirement quantity for raw material C also has been increased from 100 kilograms to 156.25 kilograms. Raw material C is not processed until operation 20, however. But at operation 20, the original production lot size (increased due to assembly scrap) of 156.25 kilograms is down to only 125 kilograms. This means that the requirement for raw material C must be increased by 25 kilograms, which in this example represents an increase of 25% over the original 100 kilograms.
In the BOM of FERT A, you select the net indicator for the BOM item of raw material C and enter an operation scrap rate of 25% for the BOM item. The net indicator means that the assembly scrap for that BOM item is ignored.
The operation scrap rate entered in the BOM means that the requirement for that BOM item is increased by 25%.
Planned Input Quantities and Planned Output Quantities Based on Planned Scrap
See also:
For information on accounting for planned scrap quantities in standard cost estimates, see
Costing Scrap.