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Overview of Raw Materials
Definition of
Raw Materials
What are Raw Materials? Raw Materials are the basic inputs, components, or unprocessed substances that a company purchases to use in its manufacturing or production processes to create finished goods. They represent the initial stage of inventory for a manufacturing business. Examples include crude oil for refineries, wood for furniture makers, flour for bakeries, or electronic components for assembling devices. The cost of raw materials is a significant part of the total cost of producing a product and is recorded as an asset on the Balance Sheet until they are used in production.
Activities Related to
Raw Materials
Here is a list of Raw Materials related activities:Â
Sourcing and purchasing raw materials from suppliers, Receiving and inspecting incoming materials, Storing raw materials appropriately to prevent damage or spoilage, Tracking quantities and costs of raw materials inventory, Issuing raw materials to the production department, Accounting for the transfer of raw materials to Work in Process (WIP) inventory, and Managing supplier relationships and lead times for material procurement. These tasks are fundamental to effective inventory control.
These activities ensure a steady supply of necessary inputs for uninterrupted production.
The Importance of
Raw Materials Management
Managing Raw Materials effectively is crucial for manufacturing businesses. The availability and cost of raw materials directly impact production schedules, product quality, and the final Cost of Goods Sold (COGS). Efficient procurement and storage can lead to cost savings and prevent production delays. Accurate tracking of raw materials inventory ensures that the company knows what it has on hand, preventing shortages or overstocking. This contributes to better financial planning and overall inventory management.
Key Aspects of
Raw Materials
Initial Inventory Stage
Represents the very beginning of the inventory life cycle in a manufacturing process, before any conversion or labor is applied.
Direct Material Cost
The cost of raw materials that are directly traceable to a finished product forms a significant part of direct material costs.
Asset on Balance Sheet
Valued at cost and reported as a current asset within the inventory account on the Balance Sheet.
Variable Cost Component
The quantity of raw materials consumed typically varies directly with the level of production, making it a variable cost.
Concepts Related to
Raw Materials
Raw Materials are a primary category of Inventory, along with Work in Process (WIP) or Goods-In-Process, and Finished Goods. Their costs are tracked through Cost Accounting and become part of the Cost of Goods Sold (COGS) when the final product is sold. Effective Inventory Management practices, such as using an Inventory Control System, apply to raw materials.
Raw Materials
in Action:
The Adventures of Coco and Cami
Coco needs flour, sugar, and fillings for her sandwiches, while Cami needs coffee beans and milk. Professor A explains these basic ingredients are their Raw Materials inventory.
See how tracking the cost and quantity of these raw materials is the first step for Coco and Cami in understanding their product costs and managing their supplies.