What Is Scrap Cost?
Scrap Cost measures the financial value of production that must be discarded because it cannot be reworked or used. It is frequently underestimated because people think of scrap cost as raw material cost — but a scrapped unit carries the full accumulated cost of material, labour, and overhead up to the point it was scrapped.
The Formula
Scrap Cost = Scrapped Units × (Material Cost + Labour Cost + Overhead to point of scrap)A unit scrapped at the end of a ten-step process costs far more than one scrapped at step one.
Data Requirements
| Source | Required | What You Need |
|---|---|---|
| Machine Data | Yes | Scrap count |
| ERP | Yes | Material costs, labour costs, overhead rates |
Scrap Cost is a Phase 3 metric — it requires ERP cost data alongside quality tracking.
Why It Matters
- Quality improvement ROI — directly quantifies the savings from reducing defects
- Hidden factory visibility — scrap cost is often much larger than people expect
- Process capability justification — supports investment in better quality systems
- Supplier quality impact — poor incoming material quality shows up as scrap cost
Best Practices
- Track scrap cost by reason code to prioritise improvement efforts
- Include full burden cost (material + labour + overhead), not just material
- Calculate ROI for scrap reduction projects using actual scrap cost data
- Focus on the most expensive scrap causes first — a small improvement in a high-cost scrap category may save more than eliminating a low-cost one entirely
Related Metrics
- Scrap Rate — the percentage view
- First Pass Yield — the process quality that drives scrap
- Defect Rate — defects that cannot be reworked become scrap
- Cost per Unit — scrap cost inflates overall unit cost