Scrap value definition
/What is Scrap Value?
Scrap value is the market price that can be obtained for the individual components of an asset. This value is derived when the owner of an asset is deciding whether to incur costs to maintain it or to stop maintaining it, tear it down, and sell the parts. The scrap value of an item can vary substantially over time, based on the supply of and demand for it.
The concept can also be applied to the residual materials that are left over after a production process. For example, there is scrap metal left over after pieces are cut from a sheet of steel. This scrap metal can be sold to a dealer for its scrap value. The scrap value obtained offsets the cost of goods sold of the business.
Scrap Value vs. Salvage Value
Scrap value is associated with the individual components of an asset, which can be obtained through their sale. Salvage value is an accounting concept that is used when calculating the periodic depreciation rate for an asset. Salvage value is the assumed price at which an asset can be sold when its useful life is complete, which may be a number of years in the future. This means that there are several differences between the concepts:
Valuation timing. Scrap value refers to the market value of something right now, while salvage value is an estimate of the future market value of an asset at the end of its useful life.
Usage. The scrap value concept is used to make current decisions about whether to scrap or repair an asset, while salvage value is a theoretical concept used to determine a periodic depreciation rate.
Example of Scrap Value
The owner of a truck is told that the truck needs a new engine, which will cost $2,500. The owner can instead elect to sell the truck to a junkyard, which is willing to pay $600 for the truck and then sell off the parts. Thus, the owner has the choice of spending more money to keep the truck operational, or to sell the vehicle at its scrap value.