How to handle high value scrap?

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Hi, I’ve been using Manager on my laptop over the last two years in order to get a handle on basic bookkeeping for my single member LLC business. I create sterling silver jewelry on a small scale (It is just me at this point.) and I’ve been reading and reading and searching for information on how I may want to handle my “scrap” sterling silver from and accounting standpoint with regard to inventory.
If someone could point me toward information in the guides or on the forum I would be very grateful.
Basically, I’m trying to figure out how to handle two types of scrap:

  1. Clean sterling silver (no silver solder present) that I can melt down and reuse
  2. “Dirty” sterling silver which would most likely be sent to a smelter for “new” sterling, credit or “cash”

So far, I’m pretty sure that I want to be using production kits to track the raw materials used in creating various pieces (all handmade at this time).
No problem there, and I also use a spreadsheet made specifically by and accountant who has worked as a jeweler. I use the spreadsheet setup for COGS and for determining pricing of finished pieces. I then use that as a way to verify what I’m entering into the books. Manager is really how I document stuff for the IRS here in the USA.

Based on reading here in the forum and going through the guides over the last two years, it sounds like what I want to do is create two new inventory items, one for clean scrap, and one for dirty scrap, and then I would just add to those based on the weights.
Does this sound correct?

The second part of this is that due to the constant fluctuation of the silver market, and the fact that scrap of different initial values gets mixed together in a bucket (quite literally) for future use, I’m struggling to figure out how I should assign a value to it. Would I just average the value of all the scrap?

I really could use some direction on this. I have been searching for guidance in both the guides and the forums over the last two weeks, so if I’ve missed something that explains my scenario, I truly apologize.

Many thanks in advance for any and all questions and input.

Cheers!

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You are asking questions that you should be asking to your accountant, not in this forum. Youe question is about valuing and accounting for material not about how to do something in Manager

The forum is for questions on using Manager not about accounting questions

Once you have the answer from your accountant, then members of the forum can advise on how to manage the process in Manager

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This comment is not clear. The cost of goods sold is calculated automatically by Manager by transferring the average cost of inventory items sold from Inventory on hand to Inventory - cost when a sales invoice or receipt records a sale. That average cost is determined according to purchase records and production orders for the inventory item sold. It sounds like you may be expending unnecessary effort.

No, you don’t want to do that. The only thing you ever purchase is new, clean silver. It’s average cost will be calculated by the weighted average method automatically. Its consumption will be recorded when you use a production order to create a new finished inventory item, such as a ring. In doing that, you should enter the amount actually used, not including scrap. Clean, usable scrap goes back into inventory and can be remelted for the next production order. The point here is that you are only deducting from inventory the amount of clean silver actually used in finished goods. Clean scrap, for accounting purposes, has never been withdrawn from inventory.

Dirty scrap needs to be stored separately, not as an inventory item, but as scrap that can periodically be written off through disposal/recycling/etc. Whatever you recognize from sale of the dirty scrap is the value of clean silver contained in the dirty scrap. The tricky part will be conversion of the scrap sale into equivalent units (probably grams) of clean silver. That process will not be perfect. So, periodically, you will likely need to adjust your inventory by conforming the inventory on hand to a physical stock check.

Let’s summarize with a story. Assume you only make solid cast silver rings, with 10 grams of silver each. (I have no idea if that is a reasonable amount, but it doesn’t matter.) You buy ingots of silver of 1000 grams for $1,000 each. You now have silver in stock with an average cost of $1/g.

Next, you create a production order for a ring, using 10 g of silver. But, to cast the ring, you actually melt 15 g. When the ring is cooled, you break off 5 g of flash and toss that back into the melt pot. The cost of 10 g of raw silver is transferred from an ingot to the finished ring. Now you sell the ring to someone via a sales invoice. The sales invoice transfers the $10 cost of raw silver that was added to the finished ring inventory item by the production order into Inventory - cost as the cost of goods sold.

But let’s assume you also have some dirty scrap, contaminated by solder, and also including silver filings. You can’t toss that back into the melt pot, so it all goes into a separate scrap bin. Maybe it’s a fraction of a gram from this ring. But you can’t determine exactly how much actual silver is in that scrap. So two things happen when its time for selling the scrap, after you’ve made 10 rings.

The first is that your remelter/recycler will tell you that she is paying you for 2 g of silver. You enter that in Manager as a sales invoice at the unit price given by the remelter. This sales invoice takes the cost of those 2 grams out of inventory at the same $1/g average cost. That squares the financial side. But you’ve also been assuming all the flash and filings went back into the melt pot. So the sales invoice also takes care of the 2 g of silver that never made it back to the melt pot and, therefore, wasn’t actually in inventory. (Technically, it really was, but it was hiding in your scrap bin in the form of dirty silver.)

The second thing that needs to happen is that, at the end of a month, or a quarter, or a year, you physically count all your remaining ingots of silver and weigh the contents of the melt pot. You will find that your inventory is not perfect. You’ll be off by a gram or two. So you either create a write-off if you’re short, or a journal entry (as a write-on) if you’re over.

Bottom line: inventory items only for raw, clean silver and finished rings. Scrap does not enter the picture in the Inventory Items tab. It is only a temporary repository of the raw silver item that is not suitable for adding back to the melt pot. Rigorous accounting will tell you to complete all this before the end of an accounting period, whatever that may be for you. In your situation, there is probably no reason to do it more often than annually.

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Joe91:
Fair enough, I had wondered if this was more of an accounting question.
I appreciate you taking the time to read my questions as I’m still in “bootstrap” mode with my business.

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Tut,
Re 1st part: it has to do with me using two methods (Manager and a Spreadsheet that was setup by a bookkeeper who has made and sold jewelry) of keeping track of raw materials. It’s really just a difference in feature sets that happily overlap.
I like Manager a lot. However, it doesn’t have formulas, specific to making jewelry, that help me calculate industry related sales prices so I don’t undervalue my work. For now, I have been using it to help me figure out how I may want to be adding in the raw materials into Manager. It’s redundant, and my plan is to just go with Manager once I have a better handle on things. For example: I was recently weighing some earrings I made and the spreadsheet helped me figure out that I was entering in something incorrectly in Manager. It’s just how I’m learning for now as I don’t have a second set of eyes on my end.
This spreadsheet setup also helped me figure out the other day that that I really needed to enter in my raw metals as grams regardless of the weight unit used by suppliers.
I don’t know as I would have caught some of these things otherwise (or at least early on.)

Re the 2nd part: Wow! Thank you so much for taking the time to explain that!
I’d seen a few posts in the forum with stuff like cloth, cordage, etc., but in those examples the waste appeared to be considered “trash” by all the parties involved in the forum post.
You explanation makes a lot of sense to me and your example story really does a good job of capturing my situation and how to go about dealing with it in Manager.

I am definitely bookmarking this for future reference!

Cheers!

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This is almost always a bad idea and a waste of effort. Why use the spreadsheet to do what Manager will do without error? It doesn’t matter how experienced the author of the spreadsheet might be. It’s still a waste.

You just proved my point. An overlap means duplication of effort.

Not true. Any numerical field in Manager will accept formulas. See https://www.manager.io/guides/18222. What the program does not have is price estimating capabilities specific to any industry. But once you know your costs (from your production orders) you can use a formula, either when defining an inventory item or entering a sales invoice, to calculate the stepped-up price that gives you the profit margin you want.

That’s not necessarily true, though it might be. You need to decide the unit of measure you will use for an inventory item according to what is most useful and convenient for your business. Usually, that means a unit by which you can physically count what is in stock. But sometimes, it’s handier to use a unit that is easier for selling. That may be the same unit your suppliers use. Or it might be something unique to you. But you can easily buy in one unit of measure and sell in another. There are many discussions in the forum about that. The conversions can occur on your purchase and sale-related transactions (using the calculations mentioned above), or you can use production orders to convert, for example, 1 ingot of silver into 1000 g in your inventory. You might also use inventory kits with fractional units (a ring could represent 0.01 ingot of silver).

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Thanks Tut!
I will revisit some of these in the future. You know the software much better than I do.

Some of my confusion probably lies in the fact that I’m mostly just trying to enter in anything on my books once a week and then spending the rest of my time working on design and production, and in the near future shipping, so my work is constantly shifting from one thing to the next. Long term I hope to be able to off load much of the bookkeeping and accounting to focus on the creation, selling and marketing.

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Please rethink that. Many, especially small businesses suffer because the owners/ directors leave book-keeping and financial management to others or find it less important or a burden they prefer not doing. A good manager/leader should also do those tasks no-one else likes doing. Going back to finance, if you are not abreast of your key financial data then you may not make the gross and net profit required to stay afloat.

Indeed you should consult a tax accountant when needed, especially early on because that requires a lot of additional knowledge. I think that as an entrepreneur your priority should not be with the things you like most such a jewellery design and sales but with running your business and that prioritizes making profit and thus understanding of finances.

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@Justin42, here is another idea to consider. Since you want to focus on design, production, and marketing, ask yourself seriously if it is worth tracking your silver (and other inventory items) at all. If you create to order, especially one-of-a-kind designs, why create the finished jewelry as inventory items at all? Why consider raw silver as production inventory? Depending on the rate you consume it, you could treat it as a consumable supply and simply expense it. Your accounting would be greatly simplified because you would maintain no inventory. That is, creations (from consumable supplies) would be sold immediately.

Think of how ridiculous it would be for a painter to treat a roll of canvas and some tubes of paint as inventory. They are just supplies. And if completed paintings aren’t sold at the weekend art fairs she attends, they might become inventory items. But if they are typically gone by the next weekend, why bother with that?

I recommend you discuss these ideas with an accountant. Determine whether accounting for inventory is actually necessary. Design the simplest chart of accounts that fits your planned business model and tax filing requirements. Only then should you worry about how to implement all that in Manager. I assure you, the program will be able to handle whatever requirements your accountant places on you. Whatever you spend on that advice will be well worth the cost the first time you have to file a sales or income tax return for our new business. And a workable system will reduce your workload for as long as you run the business.

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This is valuable advice. Thank you.

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Yes, I had seriously considered not keeping an inventory, however, right now, I’m working on building up items to show in an online store as opposed to custom work. I think that’s why I assumed I needed to go this route for inventory. Plus I keep silver on hand and it carries over year to year.
Having said that, I agree with you. I think I am overdue to consult with an accountant.
I really appreciate you taking the time to walk through some of this stuff. It is definitely causing me to revisit some of my decisions.

Everything I’m doing is one huge learning process. It’s a lot of work, but it’s also great.

Cheers!