Raw materials also known as primary commodity, unprocessed material, or feedstock are a fundamental substance utilized in the manufacturing of goods, final products, or intermediate materials that serve as the raw materials for future finished products. When referred to as feedstock, it is implied that these materials are crucial assets to the production of other items. Usually, they are related to natural resources, as they are unprocessed commodities such as oil, cotton, iron ore, plastic, and water.
A 2022 report showed that improving the sourcing of primary commodities has become one of the key objectives of companies reconfiguring their supply chains.
Types of Raw Materials
Unprocessed materials can be categorized into several types such as plant-based, mined, and animal-based:
- Plant-based Raw Materials: They come from plants and trees such as flowers, vegetables, fruits, cotton, wood, latex, and nuts.
- Mined: These raw materials are extracted from the earth they can be from stones, metals, and minerals to soil, sand,, or coal.
- Animal-based: They are produced or extracted by the animals such as milk, meat, furs, or wool.
However, there are two extra categories that are related to the accounting processes of a business: Direct and Indirect
Direct Raw Materials
Raw materials that are included in this category are used directly in the manufacturing processes of a finished product such as metals for a car. As for accounting, they are placed on the current assets of a company and are expensed on the income statement within the cost of goods sold. Furthermore, they can deteriorate or become unusable during storage leading the company to classify them as obsolete. In this case, the company records the inventory as a debit and reduces its assets by crediting obsolete inventory
Since 2002 the EU has had an ongoing trade deficit in raw materials including goods such as oilseeds, cork, wood, pulp, textile fibers, ores and other minerals as well as animal and vegetable oilsAccording to Eurostat
Indirect Primary Commodities
In this case, they aren’t part of the final good but instead are used in its production process. Indirect raw materials are recorded as long-term assets and they can fall under several categories such as selling, general or property, plant and equipment.
Examples of Raw Materials
As it is important to maintain raw materials inventory in the proper quantity and at the right place to avoid obsolete inventory and overstocking errors, proper inventory management should be put into place!
Here’s the raw materials calculation formula for your businesses’ manufacturing processes:
Raw materials used = opening raw material + raw material purchases – closing raw material
For the sake of this example let’s suppose that:
- The cost of raw materials purchased is equal to $5000
- the opening raw materials cost $15000
- the closing raw materials are $10000
Thus: Raw materials used = $15000 + $5000 – $10000 = $10000