Waste is the amount of raw materials lost in the production process. This may involve losses due to shrinkage, scrap, or evaporation. It is too labor-intensive to track specific waste losses in an accounting system, so instead an average cost of waste is included in the standard cost of products. When the actual amount of waste exceeds the standard waste cost, it appears as a negative quantity or usage variance in the cost accounting reports of a business.
A firm can greatly improve its overall profitability by continually driving down the amount of waste occurring within the organization. This focus includes not only production activities, but all types of waste throughout the organization. For example, a business can reduce waste by:
- Only producing enough finished goods inventory to meet immediate customer demand
- Altering the production process to reduce the amount of rework
- Altering product designs to eliminate unnecessary production steps
- Altering the production process to eliminate excess movements by production workers
- Compressing the production space to minimize the distance over which products flow through the process