Scrap Management System: Reason Codes, Costing, BOI Disposal and RFP for Thai Factories

Introduction — A Scrap Management System Is Not a Screen for Entering Defect Counts

Discussions about a scrap management system usually start from problems like these. Scrap is written in the team leader’s handwritten daily report, and the reason column says “other” almost every time. At month end, materials do not reconcile and show up as inventory count differences, and nobody knows what is sitting in the scrap area or how much. The quantities sold to scrap dealers do not match the records either. Every time scrap from BOI-promoted imported raw materials is disposed of, the accounting team has to gather documents, and auditors ask for evidence of disposal.

Here is the main point of this article up front. A scrap management system is not a screen for entering defect counts. It is a mechanism that turns the following six stages into a single flow.

• (1) At the point of origin, linked to the process, equipment, work order and lot,
• (2) the reason code and quantity (pieces and weight)
• (3) are recorded on the spot,
• (4) pass through approval and assignment to a storage category,
• (5) are reflected in inventory (correcting backflushing) and in cost (distinguishing normal spoilage from abnormal spoilage),
• (6) and at the sale or disposal exit, evidence such as approval, witnesses, quantity and photos is kept.

In Thailand, accounting, corporate income tax, the BOI and the Department of Industrial Works (DIW) each require “records and evidence”. This is why month-end batch entry is not enough. Each major ERP vendor’s documentation states that scrap quantities can be recorded with reasons attached. However, unless you build a setup in which entries are actually made on the shop floor every time (terminals, scales, reason code granularity, approvers), the functions will not be used even if they exist. The acceptance criterion is not “does it have the function”. It is decided by running your own actual spoilage cases through the system and checking whether everything from recording to the exit documents connects as a single flow.

This article is not a recommendation or ranking of specific products. Product functions are based on each company’s published documentation and are presented in the form “the company’s documentation states that…”. Laws and regulations are described within the scope of the original texts we were able to confirm. The cost estimate in the second half uses hypothetical numbers for this article.

Why Thai Factories Are Revisiting Scrap Records Now

Business sentiment in Thai manufacturing is improving. According to the aggregator site Trading Economics, the S&P Global Thailand Manufacturing PMI was 54.3 in September 2026, up from 53.8 in August. Employment, on the other hand, is reported to have declined slightly due to natural attrition. In other words, even though sentiment is improving, headcount is not increasing.

Labor-related rules are also changing. Contributions to the Employee Welfare Fund began on October 1, 2026, and until September 30, 2030, employers and employees each contribute 0.25% of monthly wages. From October 1, 2030, the rate is scheduled to be 0.50% each. According to a July 2026 report, the Thai Cabinet approved extending the work permits of about 770,000 migrant workers from Laos, Myanmar and Vietnam. The reported aim is to secure labor for the manufacturing and service sectors.

On the investment side, according to the Thailand BOI, there were 1,299 investment promotion applications in January to June 2026, worth USD 43.6 billion, up 37% year on year. By sector, electrical and electronics accounted for USD 3.56 billion, agriculture and food processing USD 1.82 billion, and automotive USD 759.2 million. Applications under “Smart and Sustainable Industry”, which covers machinery upgrades, digital technology and the adoption of automation and robotics, numbered 132, worth USD 507.6 million. All of these are application-based figures, not approved amounts or actual investment executed.

The team leader writes it in the daily report, and a clerk transcribes it at month end. With limited manpower, this is one of the first tasks to slip. Missing records then surface all at once as month-end inventory count differences, or when explanations are needed for auditors and the BOI. Now, with business sentiment improving and applications for digitalization investment being filed, is a good time to review scrap records from shop-floor entry all the way to evidence at the exit.

Scrap, Spoilage, Rework and Waste — How They Differ

First, let us align the terminology. It is common for the Japanese head office, Thai accounting staff, the BOI officer and the shop floor to use the same word “scrap” to mean different things.

Japan’s Cost Accounting Standards (1962) treat spoilage by dividing it into normal and abnormal spoilage. In process costing, the cost of spoilage is in principle borne by good units (finished goods and ending work in process). Abnormal spoilage is classified as a “non-cost item” and is not included in product cost. The handling and valuation of work scrap and spoiled goods is to follow that of by-products. The idea is that if spoiled goods have sale value or usable value, the spoilage cost is the amount after deducting that estimated value.

The Thai Revenue Department’s order ป.79/2541 (Por. 79/2541) defines a similar classification in the context of corporate income tax.

The BOI Office announcement ป.5/2543 (Por. 5/2543) defines “loss” and “scrap” for raw materials under Section 36(1). Loss means raw materials that cannot be used for their intended purpose because of defects or non-conformance with specifications, process losses, and defective or non-conforming products or parts made from those raw materials. Scrap is defined as loss that has been destroyed to the point where it no longer retains its original form.

This article covers the mechanism for recording spoilage and scrap that arise within the process and tracking them through to the exit. It is separated from adjacent areas as follows.

• Items that are reworked and returned to good condition (rework) follow a separate flow from scrap. Everything from quarantine to re-inspection is covered in our article on rework control systems. On the shop floor, the decision “repair or discard” is the branch point, so this branch is also placed on the scrap recording screen
• Disposal of unsold or slow-moving inventory is a question of the inventory exit. It is organized in our article on excess inventory reduction
• Tracking waste after disposal has been outsourced, through to completion of processing, is left to the industrial waste article mentioned in the DIW section

Accounting — Normal and Abnormal Spoilage Change Inventory and Expenses

The Thai accounting standard TAS 2 (Inventories), published by the Federation of Accounting Professions (TFAC), sets out the treatment of abnormal spoilage. Paragraph 16 lists examples of costs that are excluded from the cost of inventories and recognized as expenses in the period in which they are incurred, and item 16.1 is abnormally incurred spoilage of materials, labour or other production costs. Paragraph 38 states that the amount of inventories recognized as an expense during the period includes unallocated production overheads and the production cost of abnormal spoilage. Paragraph 13 states that fixed production overheads are allocated based on normal production capacity, and that unallocated fixed overheads are recognized as expenses in the period in which they are incurred.

In other words, under TAS 2, normal spoilage is included in the cost of good units and carried in inventory, while abnormal spoilage is not carried in inventory and becomes an expense of the period. The same one kilogram of scrap changes both the inventory value and the profit or loss for the period depending on how it is classified.

There are two points to note. First, neither TAS 2 nor the Revenue Department order contains a numerical criterion such as “abnormal if it exceeds X% of standard”. The Revenue Department order uses the normal rate set by each company as its benchmark. You need to set the normal rate yourself and keep the basis for it. Second, the accounting standards applied by Thai companies differ depending on the type of company. This article has not confirmed the treatment under TFRS for NPAEs, which is for non-publicly accountable entities. Please confirm with your auditor which standard your company applies.

What follows is editorial inference. To account for normal and abnormal spoilage separately, you need records that show, for each instance of spoilage, “what, how much and why”, and the difference from your own normal rate (planned scrap). With an operation that only enters total quantities at month end, it becomes harder to explain the basis for this distinction.

Tax — Procedures for Deducting Disposed Items and Scrap as Expenses

The Thai Revenue Department’s order ป.79/2541 (November 3, 1998) sets out the procedure, for corporate income tax purposes, for deducting abnormal spoilage, deteriorated goods, defective goods, expired goods and scrap as expenses in the period in which they are disposed of. The order was partly amended by ป.84/2542 (Por. 84/2542, May 13, 1999). The same content is also included in a manual on cost and expense issues issued by the Revenue Department in June 2024.

Clause 2 of the order treats the cost of normal spoilage as part of the cost of good units. Clause 3 sets out disposal procedures by type of enterprise.

• Enterprises in an export processing zone (IEAT): follow the disposal method set by the IEAT, and either invite the auditor as a witness or submit a disposal report to the auditor
• BOI-promoted enterprises producing for export using imported raw materials: dispose of raw materials according to the method set by the BOI, with the auditor witnessing or a report being made. Disposal of items other than raw materials follows the general procedure below
• Items that cannot be stored (food, pharmaceuticals, chemicals, etc.): after confirmation of damage and approval by an authorized person, at least the warehouse, accounting, and sales or audit departments witness and sign, and the auditor is invited as a witness
• Items that can be stored and disposed of in bulk: in addition to the above procedure, notify the local Revenue office at least 30 days before disposal (amendment by ป.84/2542)

On the other hand, in a 2007 ruling on a case concerning a pharmaceutical wholesaler, the Revenue Department replied that the order is a guideline for tax officers’ inspection and guidance, and that disposals can be deducted as expenses if there are clear documents and evidence proving that the disposal took place.

In either case, the foundation for explaining an expense deduction is evidence. Who approved it, who from which department witnessed it, what and how much was disposed of, and why it was disposed of. This is the reason for requiring a scrap management system to keep approval records, witness records, quantities and reasons, and photos. Please confirm with your local Revenue office or a tax professional which procedure your transactions fall under and whether notification is required.

BOI — Loss and Scrap from Section 36(1) Raw Materials

The BOI Office announcement ป.5/2543 (July 24, 2000) sets out the conditions and procedures for loss and scrap of raw materials that received import duty reduction or exemption under Section 36(1) of the Investment Promotion Act for use in manufacturing products for export. The scope is Section 36(1) raw materials. Enterprises using Section 30 raw materials, bonded factories or free zones follow different procedures, so please do not apply the content of this section to them as is.

According to the announcement, when applying to adjust the raw material account (deduction from the inventory balance), you apply to the BOI for permission to sell, destroy, export or donate. In doing so, you list the type of loss, the quantity or weight, the value and the cause, and keep the physical loss or scrap for inspection. The account can be adjusted without duty in the case of destruction by an approved method, export abroad, or donation to approved recipients (such as government agencies and charitable organizations). When selling loss or scrap with commercial value domestically, you pay the taxes and duties, receive the evidence of payment, and then adjust the account.

A seminar presentation from June 2023 by the BOI Chiang Mai investment promotion center explains loss by distinguishing between loss within the formula and loss outside the formula.

The same presentation also shows the destruction flow. You apply for approval of the destruction method, list the raw materials and quantities, and destroy them by the approved method in the presence of a BOI agent (a person licensed to inspect and certify). If there is commercial value, taxes are assessed on the types and quantities together, and then you apply for deduction from the account.

A note on the treatment of sales proceeds. The BOI material explains that proceeds from selling loss with commercial value in scrap form after paying taxes count as “project income” and fall within the scope of the corporate income tax exemption under Section 31. This applies only to projects that are within the exemption period and within the scope of the exemption. It does not mean that every project is unconditionally tax exempt.

What follows is editorial inference. For scrap derived from BOI raw materials, the exit depends on whether it is within or outside the formula and whether it has commercial value. Whatever the exit, records of type, quantity (weight), value and cause, and storage of the physical items are prerequisites. Scrap records linked to reason codes, weights and lots become the foundation of the application materials for the BOI as they are. BOI materials explain that production formulas and raw material account adjustments are handled in IC’s RMTS Online. For designing write-offs in RMTS, see our article on BOI raw material inventory and RMTS. Please confirm individual decisions with the BOI or a professional.

Bonded Factories and the DIW — Storage Categories and Permits for Removal

There are also rules requiring storage areas to be separated. The annex to Thai Customs Notification No. 122/2561 (general bonded warehouses, published in the Royal Gazette on June 4, 2020) compiles the sign formats for each type of bonded warehouse. For manufacturing bonded warehouses, it states that signs for the “storage area for loss within the formula” and the “storage area for loss outside the formula” are to be displayed with letters at least 2 inches high. Customs has separate rules for disposing of scrap in bonded factories and free zones. Please confirm the details of the procedure with your local customs office or customs broker.

The Ministry of Industry notification “Management of Waste or Unused Materials B.E. 2566 (2023)” has been in force since November 1, 2023 (Clauses 13 and 22 from the day after publication in the Royal Gazette). According to the unofficial English translation published by JETRO, “unused materials” in the notification refers to items no longer used in the factory, items that do not meet quality requirements and the like, regardless of whether they have commercial value. The main provisions are as follows.

• Store hazardous and non-hazardous items separately, label containers with the generator’s name, the category name and code, and the start and end dates of storage, and keep the storage layout plan up to date
• Items must not be taken outside the factory without the approval of the Director-General or another authorized official
• According to DIW training materials, the permit for removal is “กอ.1” (migrated from the former “สก.2”), the report on processing status is “กอ.2”, and monthly and annual reports are made through the iSingle Form
• The notes on the form state that removal without a permit violates Section 45 of the Factory Act and is subject to a fine of up to 200,000 baht

Saleable metal scrap can also fall under these “unused materials”. However, the schedules, exemption provisions and the treatment of sales to recyclers are detailed, and this article cannot state that “a permit is required” across the board. Please confirm how your scrap is treated with your local DIW office or your contractor. The law firm Tilleke & Gibbins explains that the generator’s responsibility does not end with handover to a contractor and continues until disposal has been properly completed. Designing tracking through to completion of disposal is covered in our article on industrial waste traceability.

The figure below summarizes the scrap exits and the evidence to keep at each.

The Overall Picture of a Scrap Management System — Six Stages from Origin to Exit

Laying out the regulations so far shows that if the record breaks at any stage, the later stages cannot be explained. A scrap management system is designed as a mechanism that connects the following six stages into one.

1. Recording at the point of origin: which process, equipment, work order and lot it came from
2. Reason and quantity: reason code, pieces and weight
3. Approval: who checked it and confirmed it as scrap
4. Storage: in which storage area and under which category (BOI within formula or outside formula, etc.) it was placed
5. Reflection in inventory and cost: correction of material consumption, distinction between normal and abnormal, variance from planned scrap
6. Exit and evidence: sale, disposal, export, donation or internal reuse, with approval, witnesses, quantity and photos

Stages 1 to 3 belong to the shop floor and quality, stage 4 to the warehouse, stage 5 to accounting and production control, and stage 6 to accounting, general affairs and the BOI officer. Because it spans departments, deciding up front who owns the records at each stage is work that comes before system selection. The following sections look at each stage in turn.

Recording at the Point of Origin — Linking to Process, Equipment, Work Order and Lot

The first stage is recording scrap at the place where it occurs. Quantities entered in bulk at month end do not show which work order, which lot or which equipment produced them. They cannot be used for analyzing reasons or for explaining the causes of loss to the BOI.

The shop-floor functions of major ERPs assume this kind of entry. Microsoft’s documentation states that on the Production floor execution interface of Dynamics 365 Supply Chain Management, workers enter scrap quantities with a numeric keypad and select a reason (None, Machine, Operator, Material). It also states that error quantities and error causes can be reported on the report-as-finished screen. Odoo’s documentation states that component scrap can be registered from the Shop Floor screen. Oracle’s documentation describes a flow in which workers report completion, scrap and reject from the dispatch list.

The basic approach is to align the unit of entry with the production actuals collection setup. If scrap can be entered on the same screen as the work order completion report, the entry effort does not increase. Requirements and acceptance for actuals collection are organized in our article on automatic collection of production actuals and our article on production actual data collection systems.

Lot linking also needs attention. In processes where lots are split or merged, if you cannot record which child lot the scrap came from, you cannot trace the cause later. For managing splits and merges, see our article on WIP lot split and merge control.

When moving away from handwritten daily reports, think about reducing the fields rather than copying the form fields onto the screen as they are. Making work orders and equipment selectable and having operators enter only quantity and reason makes it easier for entry to continue. How to digitize paper forms is explained in our article on electronic forms for a paperless factory.

Designing Reason Codes — Granularity That Reduces “Other”

When scrap reasons are almost all “other”, it is often a problem of reason code design rather than operator negligence. One of the following is happening: there are too many options to find the right one, the options do not match the shop-floor vocabulary, or none of them fits.

Looking at each company’s documentation, major ERPs are designed to record scrap quantities with reasons attached.

• Microsoft (D365): the documentation states that there are four reasons on the shop-floor interface, None, Machine, Operator and Material, and that an error cause is selected when reporting as finished
• Microsoft (Business Central): the documentation states that scrap quantities and reason codes are entered in the output journal, and that scrap quantities do not increase output
• SAP (S/4HANA): the documentation states that reason codes can be attached according to the movement type when scrapping stock, and that scrap reasons can be analyzed in the operation scrap analysis app
• Oracle: the documentation states that a reason is selected at the time of scrapping, with an optional comment
• Odoo: the documentation states that an optional scrap reason is entered on the scrap order

As with D365’s four reasons, keeping the first level to broad categories and selecting the specific phenomenon at the second level (dimensional defect, short shot, flash, scratch, trial shots during changeover, etc.) makes codes easier to choose on the shop floor and usable for analysis. There is no fixed industry guideline for the number of reason codes. Aggregate the descriptions in past daily reports by process, and decide them yourself starting from the most frequent. Then make a short comment mandatory when “other” is selected, review the comments every month, and decide whether to add new codes.

Reason codes are managed as master data, in the same way as items, BOMs and routings. If you do not decide who approves adding and retiring codes, their meanings drift little by little between factories and shifts. The planned scrap rate is also a value held in master data. For how to organize master data, see our article on manufacturing master data management. Designing reason codes so that they lead to identifying causes is covered in our article on defect root cause traceability systems.

Capturing Quantities — Pieces, Weight and Scale Integration

What unit to record quantities in depends on the type of scrap. Defects in assembled or molded parts are easy to count in pieces, while chips, offcuts, runners and spilled raw materials can only be measured by weight. Considering that the BOI announcement requires “quantity or weight” to be recorded, and that sales may be made at a price per unit of weight, weighing items when they are placed in the storage area, even for items counted in pieces, makes later reconciliation easier.

Transcribing weights by hand leads to transcription errors and missed entries. One option is to send data directly from the scale to the system. In a sponsored article published in an OPC Foundation publication, METTLER TOLEDO explains, based on discussions with its key customers, that OPC UA seems to be the preferred communication standard when sending weighing data to MES, ERP and the cloud. The company states that existing scales can be connected via the ACI400 IIoT Edge, which has a built-in OPC UA server. Odoo’s documentation states that a device used for measurement can optionally be specified in the Measure quality check.

Photos are also useful as evidence. Odoo’s documentation states that the “Take a Picture” quality check requires uploading a photo of the product so that the quality team can review it later. On the other hand, we could not confirm in any company’s documentation whether photos can be attached on the scrap registration screen itself. If you need photos, please confirm individually in your RFP whether attachments are possible on the registration screen.

Approval, Storage and Removal — Who Checks It and Where It Goes

Whether what an operator has recorded as scrap should be finalized as is, is a key design decision, because good units discarded by mistake, items that could have been repaired, and quantity entry errors get mixed in.

Oracle’s documentation describes a two-step disposition. A supervisor reviews the quantity that the operator reported as reject in the Production Supervisor workbench and selects either “Scrap” or “Reverse to Ready”. When scrapping, the supervisor enters the quantity and reason and can optionally add a comment. The company also states that reporting scrap requires a specific privilege and that reversing scrap requires a separate privilege.

This “hold, judge, confirm” flow can be designed to correspond to the “approval by an authorized person” and “witnessing and signatures by multiple departments” in Revenue Department order ป.79/2541. The idea is to separate the shop-floor judgment (quality or team leader) from the disposal approval (managers and accounting) and keep records of each. The procedure for correcting quantities after confirmation and how to keep the history are explained in our article on production actuals correction and approval.

The storage area is also part of the record. The BOI announcement requires the physical items to be kept for inspection, and the annex to the customs notification requires storage areas for loss within and outside the formula to be marked in manufacturing bonded warehouses. The Ministry of Industry notification requires separate storage, labels and a layout plan. On the system side, one approach is to hold storage areas as locations. Odoo’s documentation states that a scrap order specifies the source location and the scrap location, and that a loss account can be set on a scrap location of the “Inventory Loss” type. SAP’s documentation describes a flow in warehouse management (EWM) in which items are packed at a work center for scrapping and the goods issue is posted via a delivery document.

Examples of storage categories are as follows. Decide the names and number of categories according to your own regulatory situation and exits.

• Awaiting judgment (items on hold)
• From BOI raw materials, within the formula
• From BOI raw materials, outside the formula
• General scrap for sale (by material)
• For outsourced disposal (separated into hazardous and non-hazardous)

Reflecting Scrap in Inventory — Backflushing and Scrap Corrections

One of the causes of month-end inventory count differences is a mismatch between automatic material consumption (backflushing) and scrap records.

Microsoft’s documentation states that D365 material consumption (flushing principles) has four methods: Manual, Start, Finish and Available at location. With the Finish method, materials are consumed automatically when the production order is reported as finished, and the consumption is proportional to the quantity reported as finished.

What follows is editorial inference. If scrap is not reported while materials are being consumed in proportion to finished quantities, the materials used in the scrap remain in inventory on the books. At the month-end physical count, that amount appears as a difference, and it ends up being written off through an inventory adjustment without the cause being known. For the D365 shop-floor interface, Microsoft states that when reporting scrap, “Adjust material” can be used to adjust the estimated and actual consumption. For Business Central, it states that scrap quantities do not increase output. Whatever the method, you need to check in your own configuration how material consumption behaves at the moment scrap is reported.

Designing material issue and consumption is covered in our article on production material issue control. For isolating the causes of inventory count differences, see our article on inventory discrepancy root causes and countermeasures, and for the approval flow when adjusting differences, see our article on inventory adjustment approval systems.

Reflecting Scrap in Cost — Variance Between Planned and Actual Scrap

On the cost side, the key point is whether the plan (the scrap rate held in the BOM or item master) can be compared with actuals.

SAP’s documentation explains planned scrap in S/4HANA in three types. Assembly scrap is held in the material master and anticipates defects that occur during assembly. Component scrap is held in the BOM. For expensive components, operation scrap is used to exclude defective assemblies before the components are assembled. In the example on the company’s page, with a required quantity of 1,000 pieces and assembly scrap of 10%, a component without operation scrap is procured for 1,100 pieces with 100 pieces added, and a component with operation scrap of 1% and the net indicator is procured for 1,010 pieces with 10 pieces added.

For comparison with actuals, SAP describes two apps. Operation Scrap (App ID F2034) compares scrap recorded in production order confirmations with the expected scrap defined in the order’s operations. Material Scrap (App ID F2035) compares a material’s expected scrap rate with actuals and is used as feedback for updating the expected rate.

Microsoft’s documentation divides planned scrap in D365 into constant and variable scrap. Constant scrap is scrap that always occurs in the same amount in each production run, regardless of the finished quantity. In the company’s example, for 100 liters of required raw material, variable scrap of 20% and constant scrap of 10 liters are planned, and 100 x 1.20 + 10 = 130 liters is procured.

For the cost of actual error quantities, Microsoft states that two treatments can be chosen: allocating the value of error quantities reported as finished to the good units, or posting it to a dedicated scrap account. One possible design is to map these two treatments to the accounting idea that normal spoilage is borne by good units and abnormal spoilage is expensed (this is an editorial interpretation). Please decide with your auditor which treatment to use for which reasons and within what range of rates.

Analysis of variances between standard and actual is explained in our article on standard costing systems, and a mechanism for viewing costs daily in our article on manufacturing cost management systems.

Reducing Scrap by Reason — Analysis and Countermeasures

The ultimate purpose of recording is to reduce scrap. With reason codes linked to the point of origin, you can look at the data from angles such as the following.

• Pareto by reason: ranking reasons by count or weight narrows down what to tackle first
• By process and equipment: even for the same item, is scrap concentrated on particular equipment or molds?
• By material and lot: is it increasing with particular supplier lots or material lots?
• By shift and operator: is it a training or procedure issue? (not to be used to blame individuals)
• By time of day: is it concentrated right after changeovers or at start-up?

Losses at changeover and start-up occur in a fixed amount each time regardless of production volume, so they can be built into the plan as what D365 calls constant scrap (this is an editorial interpretation). Reducing the number of lots and shortening changeovers can, in some cases, directly lead to less scrap. For how to analyze changeovers, see our article on changeover time reduction analysis.

Efforts to find causes by linking scrap to process conditions and equipment data are covered in our article on yield improvement with AI, and the approach of tracing causes back from the lot where defects occurred in our article on in-process defect traceback.

There is no fixed industry standard for scrap rate reduction targets. A realistic approach is to use the values from the first few months in which the current state has been recorded correctly as the baseline, and set your own targets for each reason.

Requirements for the RFP and FAT/SAT Acceptance Criteria

Scrap management functions are often provided as part of an ERP or MES. In the RFP, ask not “is there a scrap function” but what can be done at each of the six stages.

Asking vendors to break their quotes into five parts, hardware (terminals, scales), software and licenses, ERP integration, master data preparation (reason codes, planned scrap rates, storage areas) and testing, makes them easier to compare. It also clarifies the boundary between what the ERP functions can cover and what needs to be built additionally.

Acceptance testing is structured as follows.

• FAT (factory acceptance test): as an example, select 10 to 20 past actual spoilage cases. Mix in cases derived from BOI raw materials, cases to be sold, cases to be sent for outsourced disposal, and cases returned to good condition at judgment. Run them through and confirm that everything from recording, approval, inventory and cost through to the exit documents passes as a single flow
• SAT (site acceptance test): run one or two lines for a set period in parallel with the paper daily reports, and reconcile the quantities in the system, the quantities on paper and the weights in the storage area

Please decide the numerical pass criteria yourself (length of the parallel run, quantity match rate, upper limit on the share of “other”, etc.). Put your own target values in the RFP as examples, and finalize them in discussion with the vendor. How to write the RFP as a whole is explained in our article on production management system functions and the RFP, and how to decide on the contract for ERP integration in our article on ERP integration.

Cost and Benefit Model Estimate (Hypothetical Numbers)

All numbers from here on are hypothetical numbers for this article. We could not confirm a published price for scrap management functions on their own, so costs are also assumed. Actual amounts vary greatly depending on factory conditions and quotes.

The assumptions are as follows (unit: THB).

• Monthly material cost is 5,000,000, and the share of materials that become scrap is assumed to be 3%. Scrap material cost is 150,000 per month, 1,800,000 per year
• Benefit (1): recording at the point of origin and countermeasures by reason reduce scrap volume by 15%. 1,800,000 x 15% = 270,000 per year
• Benefit (2): investigation time for inventory count differences and scrap tallying falls by 40 hours per month. 40 hours x 200 THB = 8,000 per month, 96,000 per year
• Benefit (3): sorting and recording raise the selling price. 8 tonnes (8,000 kg) per month x 2 THB/kg = 16,000 per month, 192,000 per year. The portion derived from BOI raw materials is assumed to follow the rules, such as domestic sale after paying duties
• Costs: initial 1,200,000 (terminals, scale integration, ERP integration, master data preparation, testing), operating 180,000 per year

(Unit: THB. Reduction rates, prices and costs are all assumptions)

The calculations are as follows.

• Base case: 270,000 + 96,000 + 192,000 = 558,000. 558,000 – 180,000 = 378,000. 1,200,000 / 378,000 ≈ 3.2 years
• Conservative case: 1,800,000 x 10% = 180,000. 180,000 + 96,000 = 276,000. 276,000 – 180,000 = 96,000. 1,200,000 / 96,000 = 12.5 years

Here are three points on how to read the estimate.

First, most of the benefit is determined by reducing the scrap volume itself and by sorting. Of the base case’s annual benefit of 558,000, Benefit (1) at 270,000 and Benefit (3) at 192,000 account for 462,000. The reduction in investigation time (96,000) alone cannot cover the operating cost of 180,000 per year.

Second, simply introducing a recording system does not pay back. If, as in the conservative case, the reduction stays at 10% and the selling price does not change, payback takes 12.5 years. Whether you can narrow down causes with reason codes and connect them to countermeasures is what makes the difference.

Third, you need to substitute your own figures. Material costs and scrap ratios differ greatly from factory to factory. Please recalculate using your own material costs, scrap ratio and sales record. Benefit (3) assumes a sorting procedure and an agreement with buyers. Please do not count it as a benefit until quantity records have stabilized in the SAT parallel run.

Frequently Asked Questions

What is a scrap management system?

It is a mechanism that connects, in a single flow, recording spoilage and scrap from the process at the point of origin together with reason and quantity, passing them through approval and storage, reflecting them in inventory and cost, and keeping evidence at the sale or disposal exit. It is sometimes introduced as a standalone product, but it is mostly provided as part of the functions of an ERP or MES.

Is Excel not good enough for spoilage management?

Excel is fine if you only need to total quantities. However, it becomes difficult to maintain links to the point of origin (work order, equipment, lot), approval records, change history and corrections to material consumption in inventory in Excel. Considering situations where you have to show evidence to the Revenue Department or the BOI, we recommend at least a setup that keeps approvals and change history.

How many scrap reason codes should we have?

There is no fixed industry guideline. Aggregate the descriptions in past daily reports by process, and decide them yourself starting from the most frequent reasons. Using broad categories (equipment, work, material, etc.) at the first level and selecting the specific phenomenon at the second level makes codes easier to choose on the shop floor. Make a comment mandatory when “other” is selected, and review regularly.

How should BOI scrap be handled?

The BOI announcement ป.5/2543 requires, for Section 36(1) raw materials, a list of the type of loss, quantity or weight, value and cause, and storage of the physical items. The account can be adjusted without duty for destruction by an approved method, export, or donation to approved recipients, and for domestic sale, taxes and duties are paid first. Section 30 raw materials, bonded factories and free zones follow different procedures. Please confirm individual handling with the BOI or a professional.

How is abnormal spoilage determined?

Neither TAS 2 nor the Revenue Department order contains a numerical criterion such as “abnormal if it exceeds X%”. The Revenue Department order uses the rate each company has set as the normal rate for its production method as the benchmark. The prerequisite is to set your own normal rate and record its basis along with actuals by reason. Please confirm accounting judgments with your auditor.

Are the ERP’s scrap functions enough on their own?

Each company’s documentation states that major ERPs have functions to record scrap quantities with reasons and to compare planned scrap with actuals. What is often missing is a setup in which entries are actually made on the shop floor every time (terminals, scales, reason code granularity, approvers), and the exit documents for the BOI, the Revenue Department and the DIW. Run your own actual spoilage cases through the system, check where the record breaks, and then decide the scope of additions.

How much does it cost?

We could not confirm a published price for scrap management functions on their own. For reference, Microsoft’s US pricing page shows Dynamics 365 Supply Chain Management at USD 210 per user per month and Premium at USD 300 (both paid yearly, viewed on October 13, 2026). A simple conversion at 1 USD ≈ 33.80 baht puts USD 210 at about 7,098 baht. This is not the Thai price, and the same page notes that actual prices may differ by currency, country and region. In practice, please compare quotes that include terminals, scales, integration and master data preparation.

Summary

• A scrap management system is not a screen for entering defect counts. It is a mechanism that connects source recording, reason and quantity, approval, storage, inventory and cost, and evidence at the exit into a single flow
• Under TAS 2, abnormal spoilage becomes an expense of the period. There is no numerical criterion for “abnormal”, so set your own normal rate and keep records that allow the distinction
• Revenue Department order ป.79/2541 sets out, as the procedure for deducting disposals as expenses, approval by an authorized person, witnessing and signatures by multiple departments, and 30 days’ advance notice for items that can be stored. Clear evidence is the foundation
• BOI announcement ป.5/2543 applies only to Section 36(1) raw materials, and records of type, quantity or weight, value and cause, plus storage of the physical items, are prerequisites. For domestic sale, taxes and duties are paid first
• Under the Ministry of Industry notification B.E. 2566, unused materials are covered regardless of commercial value, and removal outside the factory requires a permit. Confirm the treatment of scrap for sale with your local office or contractor
• Structure reason codes hierarchically and make a comment mandatory for “other”. Decide the number of codes yourself
• With a setting that automatically consumes materials in proportion to finished quantities, failing to report scrap leaves materials on the books and creates inventory count differences
• Decide the acceptance criteria not by whether functions exist but by whether your own actual spoilage cases pass through all the way to the exit documents
• In the estimate, most of the benefit is determined by reducing scrap volume and by sorting, and simply introducing recording does not pay back

You are welcome to consult TOMAS TECH even if you are still at the stage of considering how to record scrap, organizing reason codes, or designing records for scrap derived from BOI raw materials. We work with Japanese-owned factories in Thailand, starting from taking stock of current daily reports and storage areas, through organizing requirements, the RFP and FAT/SAT. Please contact us here.

References

• มาตรฐานการบัญชี ฉบับที่ 2 เรื่อง สินค้าคงเหลือ (TAS 2, TFAC)
• คู่มืออธิบายมาตรฐานการบัญชี ฉบับที่ 2 เรื่อง สินค้าคงเหลือ (TAS 2 Manual, TFAC)
• Cost Accounting Standards, Section 35: Calculation and Treatment of Spoilage Costs (Wikibooks reprint, Japanese)
• Cost Accounting Standards, Section 27: Treatment of Spoilage and Shrinkage (Wikibooks reprint, Japanese)
• Cost Accounting Standards, Section 28: Treatment and Valuation of By-Products (Wikibooks reprint, Japanese)
• Cost Accounting Standards, Section 5: Non-Cost Items (Wikibooks reprint, Japanese)
• Assembly Scrap (SAP Help Portal)
• Operation Scrap (SAP Help Portal)
• Operation Scrap, App ID F2034 (SAP Help Portal)
• Material Scrap, App ID F2035 (SAP Help Portal)
• Manage Stock (SAP Help Portal)
• Scrapping (EWM, SAP Help Portal)
• Report production orders as finished (Microsoft Learn)
• Production posting (Microsoft Learn)
• Set up scrap to calculate raw material requirements (Microsoft Learn)
• How workers use the production floor execution interface (Microsoft Learn)
• Flushing principles (Microsoft Learn)
• Post Scrap Manually (Business Central, Microsoft Learn)
• How You Report Operation Transactions (Oracle Docs)
• Perform Disposition of Rejected Quantities for a Work Order Operation During Production Supervision (Oracle Docs)
• Scrap inventory (Odoo 19.0 Documentation)
• Scrap during manufacturing (Odoo 19.0 Documentation)
• Quality control points (Odoo 19.0 Documentation)
• Announcement No. Por 5/2543: Conditions and Procedures For Loss and Scrap of Raw Materials Under Section 36(1) (Thailand BOI)
• การใช้สิทธิประโยชน์ด้านวัตถุดิบ และวิธีปฏิบัติเกี่ยวกับส่วนสูญเสีย (BOI Chiang Mai investment promotion center, 2023-06-16)
• RMTS Online training materials (BOI Korat investment promotion center)
• ประกาศกรมศุลกากร ที่ 122/2561 (Royal Gazette)
• คำสั่งกรมสรรพากร ที่ ป.79/2541 (Thai Revenue Department)
• คำสั่งกรมสรรพากร ที่ ป.84/2542 (Thai Revenue Department)
• ข้อหารือ กค 0706/5525 (Thai Revenue Department, 2007-06-04)
• คู่มือ ประเด็นด้านต้นทุนและค่าใช้จ่าย (Thai Revenue Department, 2024-06)
• Notification of Ministry of Industry: Management of Waste or Unused Materials B.E. 2566 (unofficial English translation published by JETRO)
• Thailand Embraces Polluter-Pays Principle as New Regulation on Industrial Waste Takes Effect (Tilleke & Gibbins, 2023-12-04)
• การขออนุญาตนำสิ่งปฏิกูลหรือวัสดุที่ไม่ใช้แล้วออกนอกบริเวณโรงงาน (กอ.1) และ (กอ.2) (DIW training slides)
• Modern Connectivity to MES / ERP and Cloud Systems for Weighing (OPC Connect, METTLER TOLEDO sponsored article, 2020-03)
• Dynamics 365 Supply Chain Management pricing (Microsoft)
• PR No.117/2569 Thailand Secures $43.6bn 1H 2026 Investment Surge (Thailand BOI)
• Thailand’s Employee Welfare Fund Contributions to Start in October 2026 (DFDL)
• Thailand extends work permits for migrant workers from Laos, Myanmar, Vietnam (The Star)
• Thailand Manufacturing Sector Hits 9-Month High (Trading Economics)