What exactly counts as scrap cost here?

Defect rate times volume times unit cost, the direct cost of units that do not pass, plus any rework cost you include; it does not include prevention or appraisal spending.

How much would fixing the defect rate actually save?

Re-run the calculation at a lower defect rate and compare; the difference is the annual savings a real process improvement at that new rate would be worth.

Does this account for scrapped material's salvage value?

No, it prices the full unit cost as lost; if scrapped material has real salvage or recycling value, net that against unit cost before entering it for a more accurate figure.

When should I use Cost of Poor Quality instead?

When scrap and rework are not the only quality costs worth counting, prevention and appraisal spending included, use Cost of Poor Quality for the fuller picture.

Quality

Scrap Cost Decision

Price the annual cost of scrap and defects, and whether rework beats scrapping and remaking for the defective units.

Defect ratefraction of units produced that come out defectiveVolumeunits produced per year, good and defective combinedUnit cost$ / unit to scrap and remake a defective unit

Annual scrap cost$36,000 / year

Defective units / year3,000

Good units / year97,000

Cost per defective unit$12

Scrap cost per unit produced$0.36

Continue Analysis

Based on your results, these related decisions are available.

Resources

Visual The Cost of Poor Quality Nobody Puts on the P&L A 3% defect rate on 100,000 units a year does not show up as a line item anywhere. Priced out with the standard prevention-appraisal-failure framework, it is $99,000 a year, and $46,000 of it goes away by cutting the rate to 1%.

How this works

Annual scrap cost is the number of defective units produced in a year, priced at whatever it actually costs to make each one right again. That cost is not always the full scrap-and-remake cost, when a rework option is entered and it costs less than scrapping and remaking, this engine prices the defective units at the cheaper rework rate instead, since a business that can repair a defect for less than remaking it should not be charged the higher figure.

Key terms

Defect rate: the fraction of units produced that come out defective.
Unit cost: the cost to scrap a defective unit and produce a replacement.
Rework cost: the optional cost to repair a defective unit instead of scrapping it, used only when it is cheaper than the unit cost.
Scrap cost per unit: annual scrap cost divided by total volume produced, good and defective combined.

Assumptions

Defect rate is stable across the volume produced
A defective unit is either fully scrapped and remade or fully reworked, not partially each
Rework cost, when entered, applies uniformly to every defective unit

Limitations

Does not include appraisal or prevention spending, see Cost of Poor Quality for the full quality-cost total
One defect type or an averaged rate, not a breakdown across multiple defect categories
Does not size or cost the improvement needed to lower the defect rate, see Defect Reduction ROI

Sources

Standard cost-of-quality treatment of scrap and rework cost, consistent with the Prevention-Appraisal-Failure framework used in Cost of Poor Quality (Juran's Quality Handbook).

Worked example

At 50,000 units/year, a 5% defect rate, and a $40 unit cost, 2,500 defective units would cost $100,000/year if every one were scrapped and remade. But with a $15/unit rework option entered and rework cheaper than scrapping, the same 2,500 defective units cost $37,500/year instead, a $62,500/year difference a naive always-scrap calculation would miss entirely.

Common use cases

Pricing the true annual cost of a known defect rate before deciding to invest in fixing it
Testing whether adding a rework option is worth it against pure scrap-and-remake cost
Feeding an annual scrap cost figure into Cost of Poor Quality or Defect Reduction ROI

Frequently asked

What exactly counts as scrap cost here?: Defect rate times volume times unit cost, the direct cost of units that do not pass, plus any rework cost you include; it does not include prevention or appraisal spending.
How much would fixing the defect rate actually save?: Re-run the calculation at a lower defect rate and compare; the difference is the annual savings a real process improvement at that new rate would be worth.
Does this account for scrapped material's salvage value?: No, it prices the full unit cost as lost; if scrapped material has real salvage or recycling value, net that against unit cost before entering it for a more accurate figure.
When should I use Cost of Poor Quality instead?: When scrap and rework are not the only quality costs worth counting, prevention and appraisal spending included, use Cost of Poor Quality for the fuller picture.