diff --git a/erpnext/manufacturing/doctype/bom/bom.js b/erpnext/manufacturing/doctype/bom/bom.js
index 4882354..ce4c4cb 100644
--- a/erpnext/manufacturing/doctype/bom/bom.js
+++ b/erpnext/manufacturing/doctype/bom/bom.js
@@ -86,7 +86,7 @@
 				refresh_field("scrap_items");
 				doc = locals[doc.doctype][doc.name];
 				erpnext.bom.calculate_rm_cost(doc);
-				erpnext.bom.calculate_sm_cost(doc);
+				erpnext.bom.calculate_scrap_materials_cost(doc);
 				erpnext.bom.calculate_total(doc);
 			},
 			freeze: true
@@ -137,7 +137,7 @@
 }
 
 //sm : scrap material
-erpnext.bom.calculate_sm_cost = function(doc) {
+erpnext.bom.calculate_scrap_materials_cost = function(doc) {
 	var sm = doc.scrap_items || [];
 	total_sm_cost = 0;
 	for(var i=0;i<sm.length;i++) {
@@ -188,7 +188,7 @@
 cur_frm.cscript.validate = function(doc, dt, dn) {
 	erpnext.bom.calculate_op_cost(doc);
 	erpnext.bom.calculate_rm_cost(doc);
-	erpnext.bom.calculate_sm_cost(doc);
+	erpnext.bom.calculate_scrap_materials_cost(doc);
 	erpnext.bom.calculate_total(doc);
 }
 
diff --git a/erpnext/manufacturing/doctype/bom/bom.json b/erpnext/manufacturing/doctype/bom/bom.json
index 94d5139..f1b5392 100644
--- a/erpnext/manufacturing/doctype/bom/bom.json
+++ b/erpnext/manufacturing/doctype/bom/bom.json
@@ -366,7 +366,7 @@
   {
    "allow_on_submit": 0, 
    "bold": 0, 
-   "collapsible": 0, 
+   "collapsible": 1, 
    "columns": 0, 
    "fieldname": "scrap_section", 
    "fieldtype": "Section Break", 
@@ -894,7 +894,7 @@
  "issingle": 0, 
  "istable": 0, 
  "max_attachments": 0, 
- "modified": "2016-09-26 02:27:05.092369", 
+ "modified": "2016-10-24 11:26:08.751123", 
  "modified_by": "Administrator", 
  "module": "Manufacturing", 
  "name": "BOM", 
@@ -910,6 +910,7 @@
    "export": 0, 
    "if_owner": 0, 
    "import": 0, 
+   "is_custom": 0, 
    "permlevel": 0, 
    "print": 1, 
    "read": 1, 
@@ -930,6 +931,7 @@
    "export": 0, 
    "if_owner": 0, 
    "import": 0, 
+   "is_custom": 0, 
    "permlevel": 0, 
    "print": 1, 
    "read": 1, 
diff --git a/erpnext/manufacturing/doctype/bom/test_records.json b/erpnext/manufacturing/doctype/bom/test_records.json
index 30be2a7..da8d67b 100644
--- a/erpnext/manufacturing/doctype/bom/test_records.json
+++ b/erpnext/manufacturing/doctype/bom/test_records.json
@@ -28,9 +28,20 @@
   "quantity": 1.0
  },
  {
+  "scrap_items":[
+  {
+   "amount": 2000.0,
+   "doctype": "BOM Item",
+   "item_code": "_Test Item Home Desktop 100",
+   "parentfield": "items",
+   "qty": 1.0,
+   "rate": 2000.0,
+   "stock_uom": "_Test UOM"
+  }
+  ],
   "items": [
    {
-    "amount": 5000.0,
+    "amount": 10000.0,
     "doctype": "BOM Item",
     "item_code": "_Test Item",
     "parentfield": "items",
@@ -81,7 +92,7 @@
     "doctype": "BOM Item",
     "item_code": "_Test Item Home Desktop Manufactured",
     "parentfield": "items",
-    "qty": 2.0,
+    "qty": 3.0,
     "rate": 1000.0,
     "stock_uom": "_Test UOM"
    }
diff --git a/erpnext/manufacturing/doctype/production_order/test_production_order.py b/erpnext/manufacturing/doctype/production_order/test_production_order.py
index 49db299..1454c10 100644
--- a/erpnext/manufacturing/doctype/production_order/test_production_order.py
+++ b/erpnext/manufacturing/doctype/production_order/test_production_order.py
@@ -233,6 +233,45 @@
 		self.pro_order.reload()
 		self.assertEqual(len(self.pro_order.required_items), 0)
 
+	def test_scrap_material_qty(self):
+		prod_order = make_prod_order_test_record(planned_start_date=now(), qty=2)
+
+		# add raw materials to stores
+		test_stock_entry.make_stock_entry(item_code="_Test Item",
+			target="Stores - _TC", qty=10, basic_rate=5000.0)
+		test_stock_entry.make_stock_entry(item_code="_Test Item Home Desktop 100",
+			target="Stores - _TC", qty=10, basic_rate=1000.0)
+
+		s = frappe.get_doc(make_stock_entry(prod_order.name, "Material Transfer for Manufacture", 2))
+		for d in s.get("items"):
+			d.s_warehouse = "Stores - _TC"
+		s.insert()
+		s.submit()
+
+		s = frappe.get_doc(make_stock_entry(prod_order.name, "Manufacture", 2))
+		s.insert()
+		s.submit()
+
+		prod_order_details = frappe.db.get_value("Production Order", prod_order.name,
+			["scrap_warehouse", "qty", "produced_qty", "bom_no"], as_dict=1)
+
+		scrap_item_details = get_scrap_item_details(prod_order_details.bom_no)
+
+		self.assertEqual(prod_order_details.produced_qty, 2)
+
+		for item in s.items:
+			if item.bom_no and item.item_code in scrap_item_details:
+				self.assertEqual(prod_order_details.scrap_warehouse, item.t_warehouse)
+				self.assertEqual(flt(prod_order_details.qty)*flt(scrap_item_details[item.item_code]), item.qty)
+
+def get_scrap_item_details(bom_no):
+	scrap_items = {}
+	for item in frappe.db.sql("""select item_code, qty from `tabBOM Scrap Item`
+		where parent = %s""", bom_no, as_dict=1):
+		scrap_items[item.item_code] = item.qty
+
+	return scrap_items
+
 def make_prod_order_test_record(**args):
 	args = frappe._dict(args)
 
@@ -243,6 +282,7 @@
 	pro_order.qty = args.qty or 10
 	pro_order.wip_warehouse = args.wip_warehouse or "_Test Warehouse - _TC"
 	pro_order.fg_warehouse = args.fg_warehouse or "_Test Warehouse 1 - _TC"
+	pro_order.scrap_warehouse = args.fg_warehouse or "_Test Scrap Warehouse - _TC"
 	pro_order.company = args.company or "_Test Company"
 	pro_order.stock_uom = args.stock_uom or "_Test UOM"
 	pro_order.set_production_order_operations()
diff --git a/erpnext/stock/doctype/stock_entry/stock_entry.py b/erpnext/stock/doctype/stock_entry/stock_entry.py
index a6f702d..cf3d604 100644
--- a/erpnext/stock/doctype/stock_entry/stock_entry.py
+++ b/erpnext/stock/doctype/stock_entry/stock_entry.py
@@ -238,6 +238,7 @@
 				d.serial_no = transferred_serial_no
 
 	def get_stock_and_rate(self):
+		self.set_production_order_details()
 		self.set_transfer_qty()
 		self.set_actual_qty()
 		self.calculate_rate_and_amount()
@@ -252,6 +253,7 @@
 	def set_basic_rate(self, force=False, update_finished_item_rate=True):
 		"""get stock and incoming rate on posting date"""
 		raw_material_cost = 0.0
+		scrap_material_cost = 0.0
 		fg_basic_rate = 0.0
 
 		for d in self.get('items'):
@@ -282,17 +284,22 @@
 					basic_rate = flt(get_incoming_rate(args), self.precision("basic_rate", d))
 					if basic_rate > 0:
 						d.basic_rate = basic_rate
+					d.basic_amount = flt(flt(d.transfer_qty) * flt(d.basic_rate), d.precision("basic_amount"))
+
+				if getattr(self, "pro_doc", frappe._dict()).scrap_warehouse == d.t_warehouse:
+
+					scrap_material_cost += flt(d.basic_amount)
 
 		number_of_fg_items = len([t.t_warehouse for t in self.get("items") if t.t_warehouse])
 		if (fg_basic_rate == 0.0 and number_of_fg_items == 1) or update_finished_item_rate:
-			self.set_basic_rate_for_finished_goods(raw_material_cost)
+			self.set_basic_rate_for_finished_goods(raw_material_cost, scrap_material_cost)
 
-	def set_basic_rate_for_finished_goods(self, raw_material_cost):
+	def set_basic_rate_for_finished_goods(self, raw_material_cost, scrap_material_cost):
 		if self.purpose in ["Manufacture", "Repack"]:
 			for d in self.get("items"):
 				if (d.bom_no or d.t_warehouse) and (getattr(self, "pro_doc", frappe._dict()).scrap_warehouse != d.t_warehouse):
-					d.basic_rate = flt(raw_material_cost / flt(d.transfer_qty), d.precision("basic_rate"))
-					d.basic_amount = flt(raw_material_cost, d.precision("basic_amount"))
+					d.basic_rate = flt((raw_material_cost - scrap_material_cost) / flt(d.transfer_qty), d.precision("basic_rate"))
+					d.basic_amount = flt((raw_material_cost - scrap_material_cost), d.precision("basic_amount"))
 
 	def distribute_additional_costs(self):
 		if self.purpose == "Material Issue":
@@ -355,14 +362,14 @@
 
 	def validate_bom(self):
 		for d in self.get('items'):
-			if d.bom_no and (d.t_warehouse != self.pro_doc.scrap_warehouse):
+			if d.bom_no and (d.t_warehouse != getattr(self, "pro_doc", frappe._dict()).scrap_warehouse):
 				validate_bom_no(d.item_code, d.bom_no)
 
 	def validate_finished_goods(self):
 		"""validation: finished good quantity should be same as manufacturing quantity"""
 		items_with_target_warehouse = []
 		for d in self.get('items'):
-			if d.bom_no and flt(d.transfer_qty) != flt(self.fg_completed_qty) and (d.t_warehouse != self.pro_doc.scrap_warehouse):
+			if d.bom_no and flt(d.transfer_qty) != flt(self.fg_completed_qty) and (d.t_warehouse != getattr(self, "pro_doc", frappe._dict()).scrap_warehouse):
 				frappe.throw(_("Quantity in row {0} ({1}) must be same as manufactured quantity {2}"). \
 					format(d.idx, d.transfer_qty, self.fg_completed_qty))
 
@@ -526,19 +533,7 @@
 		if not self.posting_date or not self.posting_time:
 			frappe.throw(_("Posting date and posting time is mandatory"))
 
-		if not getattr(self, "pro_doc", None):
-			self.pro_doc = None
-
-		if self.production_order:
-			# common validations
-			if not self.pro_doc:
-				self.pro_doc = frappe.get_doc('Production Order', self.production_order)
-
-			if self.pro_doc:
-				self.bom_no = self.pro_doc.bom_no
-			else:
-				# invalid production order
-				self.production_order = None
+		self.set_production_order_details()
 
 		if self.bom_no:
 			if self.purpose in ["Material Issue", "Material Transfer", "Manufacture", "Repack",
@@ -584,6 +579,21 @@
 		self.set_actual_qty()
 		self.calculate_rate_and_amount()
 
+	def set_production_order_details(self):
+		if not getattr(self, "pro_doc", None):
+			self.pro_doc = None
+
+		if self.production_order:
+			# common validations
+			if not self.pro_doc:
+				self.pro_doc = frappe.get_doc('Production Order', self.production_order)
+
+			if self.pro_doc:
+				self.bom_no = self.pro_doc.bom_no
+			else:
+				# invalid production order
+				self.production_order = None
+
 	def load_items_from_bom(self):
 		if self.production_order:
 			item_code = self.pro_doc.production_item
diff --git a/erpnext/stock/doctype/warehouse/test_records.json b/erpnext/stock/doctype/warehouse/test_records.json
index 4dd9f6b..af3bd23 100644
--- a/erpnext/stock/doctype/warehouse/test_records.json
+++ b/erpnext/stock/doctype/warehouse/test_records.json
@@ -10,6 +10,13 @@
   "company": "_Test Company",
   "create_account_under": "Stock Assets - _TC",
   "doctype": "Warehouse",
+  "warehouse_name": "_Test Scrap Warehouse",
+  "is_group": 0
+ },
+ {
+  "company": "_Test Company",
+  "create_account_under": "Stock Assets - _TC",
+  "doctype": "Warehouse",
   "warehouse_name": "_Test Warehouse",
   "is_group": 0
  },