Accounting Best Practices, Fifth Edition

9–16. Review Material Scrap Levels

There are a number of ways to tell if a production process is not operating as efficiently as it could. For example, labor hours are higher than expected, material usage exceeds the standard, or delivery times are chronically late. However, the accounting department does not do well in reporting on late deliveries, since this does not involve the database of financial information that the accounting staff normally accesses. Also, the direct labor pool tends to be relatively fixed in the short term, and so is surprisingly difficult to reduce. Thus, accounting reports showing excessive labor may not result in an immediate impact on this area. However, reporting on material scrap rates is well worth the effort. The reason is that a high scrap rate is the primary indicator of a host of potential problems in the production process. For example, scrap can be caused by poor operator training, bad machine maintenance, an excessive level of work-in-process inventory, and design flaws. By using material scrap as the prime indicator of problems in the production process, management can locate the reasons for it, target those problems, and eliminate them.

The problem for the accounting department is how to issue a valid material scrap rate report. If the report is inaccurate, management will not believe the numbers and will not use the information to improve the production process. It is vital to derive the most accurate information possible from the evidence ...