Scrap is made when you put any item in the Recycler and apply power to it. There is a 12.5% (1 in 8) chance it will produce Scrap. Scrap plays a big role in Cross Breeding plants, since it is needed for Fertilizer. Scrap can also be used to make Mass Fabricators six times more efficient.
A good way of producing items to be recycled into scrap is to use a handsaw on a low EMC value item, such as cobblestone, as the resulting microblocks can also be recycled at an equal rate to the original block. However, this will use the durablitiy of the handsaw and requires more EMC than if you used a 1 EMC block.
Also Scrap can be used for fuel for a furnace to smelt 1.75 items. (4 Scrap to smelt 7 items)