Raw Materials
BeginnerRaw materials are the basic inputs a manufacturer buys to turn into finished products, such as wood for furniture, steel for cars or flour for bread.
Raw materials are the first stage of a manufacturer's inventory. They have been purchased but not yet used in production. Once they enter the production process, they become work in progress, and when the product is complete, they become part of finished goods.
On the balance sheet, raw materials are included in inventory as a current asset. Their cost includes the purchase price plus costs of getting them ready for use, such as shipping and import duties.
For example, a furniture maker might hold 20,000 of timber, 3,000 of screws and fittings and 2,000 of varnish at the end of the month. Together, these are its raw materials inventory of 25,000.
Managing raw materials is important for both cost and production. Running out can stop a factory, while holding too much ties up cash and risks waste. Prices of many raw materials, such as metals, energy and agricultural products, can change significantly, which directly affects a manufacturer's costs and profit margins.
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