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Cin7 Industry Terms

What is Raw Material? Formula, Types, & Importance

Every other product we use has been produced by using some or the other raw materials. It is the most crucial component of inventory for any manufacturing unit and therefore, managing inventory of  raw materials becomes crucial too. For example, natural latex obtained from trees is used to make several finished products such as mattresses, gloves, balloons, rubber bands, tennis shoes, etc.

What is raw materials?

Raw materials are unprocessed or minimally processed material that serve as the fundamental substances or components essential for the production of goods or the provision of services.

Types of raw materials

Though all the raw materials are obtained naturally, they can be divided into 3 types based according to where it is derived from.

  1. Plant/tree-based – materials like vegetables, fruits, flowers, wood, resin, latex are obtained from plants and trees.
  2. Animal-based– materials like leather, meat, bones, milk, wool, silk are all obtained from animals.
  3. Mining-based– materials like minerals, metals, crude oil, coal, etc. are obtained by mining the earth.

Apart from this, a manufacturing unit divides the raw materials into 2 main categories.

Direct vs indirect raw materials

  • Direct raw materialsThe primary component from which a finished product is made is called direct raw materials.For example, wood is a direct raw material from which furniture like chair, tables, bed, etc. are made. Another example is leather used for making purses, shoes, bags, etc.
  • Indirect raw materialsOn the other hand, indirect raw materials are the materials that supplement in making the finished product from the direct materials.For example, the glue, nails, varnish, etc. used in making wooden furniture like chair, table, bed, etc. are all indirect raw materials. Similarly, the buckles, metal hoops, zips, glue, lining fabric, colors, etc. used in making leather purses, shoes, and bags are all indirect raw materials.

Importance of raw materials

From the above-discussed definition and meaning, it is clear that producing any finished product requires raw materials, which are then processed and made into finished goods.

This is where inventory management comes into the picture. It is important to maintain raw materials inventory in the proper quantity and at the right place to avoid any mishaps since the finished products that we sell are made from these materials.

Examples of calculating raw materials

Now, coming onto some essential formulas to use for calculating raw materials.

To know how much raw material is used in the manufacturing process, we can use the below formula:

Opening raw material + raw material purchases – closing raw material

= Raw material used

Opening raw materials worth – $ 12000

Raw materials purchased worth – $ 5000

Closing raw materials – $ 9000

 

So let us calculate as per the above formula,

 12000 + 5000 – 9000 = 8000

Thereby, when we apply the formula the result will be the raw material worth $ 8000 were used in the process.

All the closing stock worth, opening stock worth, materials purchase worth is taken from the balance sheet.

The formula used to get the closing stock of raw materials is as follows.

Opening raw materials + raw material purchases – raw material used = Closing raw materials

Let’s understand this with the help of an example,

Suppose Star Manufacturing Company has

Opening raw materials worth – $ 12000

Raw materials purchased worth – $ 5000

Raw material used worth – $ 8000

Therefore, as per the formula,

12000 + 5000 – 8000 = 9000

Hence, closing raw materials worth $9000 is with Star Manufacturing company.

Essential Resources:

Let’s understand this with the help of an example,

Suppose Star Manufacturing Company has

Opening raw materials worth – $ 12000

Raw materials purchased worth – $ 5000

Raw material used worth – $ 8000

Therefore, as per the formula,

12000 + 5000 – 8000 = 9000

Hence, closing raw materials worth $9000 is with Star Manufacturing company.

Articles:

https://www.readyratios.com/reference/accounting/raw_materials.html

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