In manufacturing, scrap is unavoidable. Materials may be damaged, components may fail quality checks, or finished goods may become unusable during production. While scrap is often viewed as operational waste, properly recording it inside an ERP system is critical for maintaining accurate costing, inventory valuation, production planning, and operational analysis.

Microsoft Dynamics 365 Business Central provides manufacturers with built-in scrap management capabilities that allow production teams to record scrap directly during manufacturing operations. By tracking scrap correctly, companies gain better visibility into production efficiency, material loss, and process improvement opportunities.

What is Scrap in Manufacturing?

Scrap refers to materials, semi-finished goods, or finished products that become unusable during the manufacturing process.

Common causes of scrap include:

• Production defects
• Machine calibration issues
• Material quality problems
• Human error
• Testing destruction
• Setup waste
• Damage during processing

Scrap directly impacts:

• Production costs
• Inventory valuation
• Yield analysis
• Capacity utilization
• Profitability

Because of this, manufacturers should never ignore or manually bypass scrap recording procedures.

Scrap Handling in Business Central

Business Central allows scrap to be recorded during:

• Output posting
• Production journal posting
• Routing operations
• Capacity registration

The system supports:

• Scrap quantities
• Scrap reason tracking
• Scrap percentages
• Fixed scrap quantities
• Operation-level scrap recording

Importantly:

Scrap quantity does not increase output quantity.

This means scrap is tracked separately from usable finished goods inventory.

Manual Scrap Posting in Business Central

The most common method is posting scrap manually through the:

Output Journal

This allows manufacturers to record actual scrap generated during production operations.

Step-by-Step: How to Post Scrap

Step 1: Open the Output Journal

Search for:

Output Journal

from the Business Central search menu.

The Output Journal is used to:

• Register finished output
• Record runtime
• Post machine or labor capacity
• Enter scrap quantities

Step 2: Enter Production Information

Fill in the production details:

• Production Order Number
• Operation Number
• Routing Reference
• Item Number
• Output Quantity
• Location Code

These details determine which production operation the scrap belongs to.

Step 3: Enter Scrap Quantity

In the:

Scrapped Quantity

field, enter the quantity of defective or wasted material generated during the operation.

Example:

Business Central records:

• 95 good units into inventory
• 5 units as scrap loss

This ensures production reporting reflects actual manufacturing yield.

Step 4: Enter Scrap Code

Business Central also provides a:

Scrap Code

field.

This allows manufacturers to record the reason for the scrap, such as:

• Material defect
• Machine issue
• Operator error
• Testing waste
• Calibration failure

Scrap Codes are extremely valuable for:

• Root cause analysis
• Quality improvement
• KPI reporting
• Lean manufacturing initiatives

Step 5: Preview and Post

Before posting, users should use:

Preview Posting

to validate:

• Inventory impact
• Ledger entries
• Capacity updates
• Cost impact

After validation, select:

Post

to finalize the scrap transaction.

How Scrap Affects Inventory and Costing

When scrap is posted:

Inventory Impact

• Good output increases inventory
• Scrap quantity is excluded from usable inventory

Costing Impact

Scrap still consumes:

• Raw materials
• Machine time
• Labor cost
• Capacity cost

Therefore, scrap directly increases production cost per good unit.

Example:

This is why accurate scrap recording is essential for manufacturing profitability analysis.

Scrap Percentage Setup

Business Central also supports planned scrap percentages.

Manufacturers can configure scrap expectations in:

• Item Cards
• Production BOMs
• Routings

This allows the system to automatically adjust:

• Material planning
• Capacity planning
• Component requirements

Scrap on Item Card

A scrap percentage on the Item Card increases:

• Expected production quantity
• Component demand
• Capacity requirements

Example:

If expected scrap is 10% and customer demand is 100 units:

Business Central plans production for:

110 units

to compensate for expected losses.

Scrap on Production BOM

Manufacturers can define scrap percentages for specific components only.

Example:

This increases only the affected component requirement.

Useful when:

• Cutting waste exists
• Material trimming occurs
• Certain components have predictable losses

Routing Scrap Factors

Business Central also supports:

• Scrap Factor %
• Fixed Scrap Quantity

inside routing operations.

This helps model:

• Machine setup waste
• Testing destruction
• Calibration material
• Production startup loss

Scrap and Backflushing

Manufacturers using:

Backward Flushing

must understand an important behavior.

Business Central calculates component consumption based on:

Good Output + Scrap Quantity

This ensures inventory consumption reflects actual material usage.

Example:

If scrap is not recorded correctly, inventory and costing may become inaccurate.

Scrap Analysis and Continuous Improvement

Tracking scrap properly enables manufacturers to analyze:

• High-loss operations
• Machine performance
• Operator quality issues
• Supplier material quality
• Production efficiency

Many lean manufacturing initiatives rely heavily on scrap analysis data.

By using Scrap Codes consistently, businesses can build powerful operational dashboards inside:

• Power BI
• Business Central reports
• Manufacturing KPIs

Common Challenges in Scrap Posting

Incorrect Scrap Recording

Some users incorrectly reduce output quantity instead of recording scrap separately.

This creates inaccurate yield analysis.

Missing Scrap Codes

Without proper Scrap Codes, root-cause analysis becomes difficult.

Warehouse Integration Issues

Advanced warehouse handling may require synchronization between:

• Production posting
• Warehouse movements
• Inventory picks

Improper setup may create inventory inconsistencies.

Inaccurate Backflushing

If scrap quantities are omitted, automatic consumption posting may understate actual material usage.

Best Practices for Manufacturers

Always Record Actual Scrap

Never hide production losses through manual adjustments.

Use Scrap Codes Consistently

Standardized codes improve reporting accuracy.

Train Shop Floor Users

Operators should understand the difference between:

• Good output
• Scrap quantity
• Rework quantity

Review Scrap Trends Regularly

High scrap trends often indicate operational or quality problems.

Test Scrap Setup in Sandbox

Before implementing automatic scrap calculations, validate scenarios carefully.

Business Benefits of Proper Scrap Management

Better Cost Accuracy

Manufacturing costs reflect real production conditions.

Improved Inventory Integrity

Material consumption aligns with actual usage.

Enhanced Production Visibility

Managers gain better insight into manufacturing efficiency.

Stronger Quality Control

Scrap tracking helps identify recurring production issues.

Better Capacity Planning

Routing scrap factors improve machine scheduling accuracy.

Conclusion

Scrap management in Microsoft Dynamics 365 Business Central is far more than simply recording waste — it is a critical part of manufacturing cost control, operational visibility, and continuous improvement.

By properly posting scrap through Output Journals, Scrap Codes, routing scrap factors, and BOM scrap percentages, manufacturers can maintain accurate inventory valuation, realistic production costing, and meaningful operational analytics.

For manufacturers seeking better production control and stronger manufacturing insights, effective scrap tracking is an essential capability within Business Central manufacturing operations.