If your business manufactures physical products, you probably deal with several forms of waste. These can be leftovers from the production process, flawed finished goods, or even a contaminated workshop. In such cases, it is in your financial and environmental self-interest to set up processes that most effectively reduce waste and its associated costs.
Efficient Product Creation and Waste
The most efficient production processes minimize waste. Input resources enter the production process and are utilized so carefully and precisely that it creates a large positive ratio between marketable finished goods and everything else.
Here is a quick rundown of the differences between spoilage, rework, and scrap:
- Spoilage – units of a product that are discarded or sold at clearance prices. Spoilage may occur even at efficient operating levels, but wasteful spoilage refers to unacceptable or unnecessary losses. Goods are considered “spoiled” when they cannot meet the specifications required by customers.
- Rework – units that are presently unacceptable due to a deteriorated physical condition but once repaired may be sold as an acceptable finished good.
- Scrap – the leftover material once production processes are completed; think of sawdust as the leftover scrap from woodworking. Depending on the resource or product involved, scrap may have some reduced sale or salvage value.
Quality Control and Minimizing Waste
The keys to waste reduction are observation and documentation. This starts by documenting product data, resource inputs, and effective design. The more you understand the process and observe its execution, the better you become at noticing and correcting unnecessary waste.
Think in terms of quality control for every step and every instrument your company relies on for the manufacturing process. Your tools and machines should operate correctly on a consistent basis, and your employees should know the correct operating procedures to maximize output efficiency.
Take your time to document each stage and think critically about how to reduce costs and minimize your spoilage, scrap, and rework.
Accounting for Spoilage, Rework, and Scrap
If you really want to control and reduce the amount of waste in your company’s production processes, you are going to need a system of accounting that can capture the value of your production waste and compare it across time.
Take the time to understand and quantify your waste costs. For example, highlight whenever your production process yields spoilage instead of rolling the value of the spoiled goods into the aggregate production costs. If the spoilage is normal and unavoidable even in an efficient production process, it is standard practice to consider it part of the work in progress inventory or good units transferred.
Scrap does not have a normal and abnormal distinction. No cost is assigned to scrap. Still, many companies maintain a separate account for scrap costs to see how much scrap potentially detracts from operating income.
The correct processes for your business depend on your products and scope. The point is to have a targeted accounting solution that not only allows your business to know itself more accurately but also serves as a warning sign whenever waste gets in the way of efficiency and profit.