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A Glass Blower’s Companion with Jason Michael -Helping Today's Glass Artist Think Like an Artistic Entrepreneur

Aug 8, 2016

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Episode 119- Waste vs. Scrap

For merchants, cost accounting is rather useful. The idea behind it is simple: buy cheap, sell expensive. To maximize your profits, you should use your limited resources (money) for activities that give you the best return on your investment.

Manufacturing, on the other hand, was usually less concerned with bookkeeping. With the different materials coming in and products going out, tools needed, and time used, it would have been difficult to keep track of it all. Historic manufacturers probably used more of a gut-feeling approach and experience to set their prices. Besides, their goal was often not profit maximization, but merely to have a good life. As Daniel Defoe observed: “There’s nothing more frequent, than for an Englishman to work till he has got his pocket full of money, and then go and be […] drunk, till, tis all gone.”
when manufacturing product each item has a specific COG required to complete.  this incudes the raw material to create,(direct cost), plus the gases, and labor(indirect costs)
part of this issue is whether or not we should determine the waste left after the manufacturing process of said item. Whether you pull points or attach blowpipes, there will be material that is scrap and considered waste. In some fields scrap is considered reusable so for this chat I will be referring to the leftovers as waste which is unable to be reused and therefor sold.
to use the food industry for an example they have plenty of waste associated with the manufacturing of meals. for example, If broccoli is on the menu then a bulk order of broccoli is needed.   say each head of broccoli weighs 1lb and comes in a 10lb box that cost $20.00.  . this would mean the cost of each unit of broccoli costs $2.00      Now when the broccoli is being processed to cook  a portion of the broccoli is removed and would be considered waste. lets use 50% as how much of the broccoli is removed which would mean 50% is left.   this would bring the true cost of each unit to $4.00 per headof broccoli since technically we just removed 50% of the weight but it still cost us $20.00 total.  
we can use the same concept when it comes to calculating cost of goods manufactured.  say for example a 2lb.- 3" wrap and rake spoon costs .50 to make in direct cost (raw material)and an additional  indirect cost(overhead) of .50.   this unit  would initially cost $1.00 to manufacture. after the item is made you are left with a little bit of waste which for the sake  of this example lets call it  1/2 lb of material.   when weestimated our baseline costs for each item we figured a 3"w/r spoon weighs 2lbs (chunky spoon) which costs $1.00 to make,  so if we do the math and break down the cost,  we can determine that the waste costs (.50/lb=.25 in waste)  now if you work for a week and manufacture 100- 3'wrap and rakes you will have an estimated amount of waste at $25.00   multiply that by 12- months and  you'll see that theres approx $300.00 in waste.   this is one way to look at it.. 100/week=$25.00 in waste 
the other perspective is to increase the direct cost to manufacture each item by adding the waste back into the peice.   We figured to waste cost .25 and the actual item when complete weighs 1.5lbs.  so you can then add the .25 back into the cost to manufacture the item which would mean the 1.5lbs of material costs $1.00.
in the end talk to your accountant and ask them what they recomend you do to keep track of this info.  whether A- you seperate the true cost to manufacture from waste. or B. you ignore the waste but increase the cost of goods by the amount of the value you predetermined for the item manufactured.
Either way before you begin adding new items to your catalog, estimate the direct cost(raw material) to manufacture as well as Overhead(indirect cost) when figuring out costs per item made. this will not only give you a baseline cost of your new products it will also give you a base line number to price your item to be sold at  both wholesale and retail.   
Manufacturing cost is the sum of costs of all resources consumed in the process of making a product. The manufacturing cost is classified into three categories: direct materials cost, direct labor cost and manufacturing overhead.

What are manufacturing costs?

Manufacturing costs are the costs necessary to convert raw materials into products. All manufacturing costs must be attached to the units produced for external financial reporting under US GAAP. The resulting unit costs are used for inventory valuation on the balance sheet and for the calculation of the cost of goods sold on the income statement.

Manufacturing costs are typically divided into three categories...
  1. Direct materials. This is the cost of the materials which become part of the finished product. For example, the cost of wood is a direct material in the manufacture of wooden furniture.
  2. Direct labor. This is the cost of the wages of the individuals who are physically involved in converting raw materials into a finished product. For example, the wages of the person cutting wood into the specified lengths and the wages of the assemblers are direct labor costs in a furniture factory.
  3. Factory overhead or manufacturing overhead. Factory overhead refers to all other costs incurred in the manufacturing activity which cannot be directly traced to physical units in an economically feasible way. The wages of the person who inspects the completed furniture and the depreciation on the factory equipment are part of the factory overhead costs. Factory overhead is also described as indirect manufacturing costs.

Deduction for Food Waste

Restaurants, grocers and other businesses that carry food in inventory can deduct the cost of purchasing all of their food supplies like any other ordinary business expense. The business gains the tax deduction as soon as it incurs the expense, regardless of whether the food is sold to a customer or tossed into a dumpster. Because the deduction reduces the business’ taxable income, the total savings depends on at what rate the business is taxed.