What is the Raw Material Inventory?
Raw materials inventory is the cost of products in the inventory of the company which has not been used for finished products and work in progress inventory. Raw material inventory is part of inventory cost which is reported under current assets on the balance sheet.
Types of Raw Materials
There are two types of raw materials:
- Direct Raw Materials are the ones which reused directly into the finished product like steel is used in the making of a table, plastic is used in making of a chair.
- Indirect Raw Materials are the ones that are used in complementary to the direct raw materials. Examples of indirect raw materials include oil, lubricant, light bulbs, screws, nuts, bolts, etc.
Examples of Raw Material Inventory
Let us now look at some of the examples of raw material inventory for Companies in different sectors:
Consider the inventory of a large Oil Company – Shell. In the notes to the balance sheet, the raw material inventories for the Company are stated as the ‘Oil, gas and chemicals’ and ‘Materials’.
The ‘oil, gas and chemicals’ inventory decreased by 15% from $ 22,962 Mn in Dec. 2017 to $ 19,516 Mn in Dec. 2018. The materials inventory decreased from $ 2,261 Mn to $ 1,601 Mn from Dec 2017 to Dec. 2018 (a decrease of 29.19%).
General Motors, which is one of the biggest automobile Companies. They purchase a variety of raw material which includes parts, supplies from various suppliers which are used to make the end products i.e. cars. The raw materials for General motors include various kinds of metals like steel, aluminum, resins, copper, lead, and platinum.
In the annual report, the carmaker has not specifically mentioned the raw materials but combined the cost of such inventory at the end of the year. The raw material at the end of the year 2017 and 2018 was nearly similar to $ 4,274 Mn on Dec. 2018 and $ 4,203 Mn on Dec. 2017.
Consider Boeing Inc., one of the largest aircraft manufacturers. The Company has not disclosed it specifically but they have provided inventories as per their various aircraft contracts. However, in general, raw material includes used aircraft, stock materials, and spare parts.
Now, we consider Microsoft Inc.’s producer of windows, laptops, software, and various other computer products.
The balance sheet of the Company shows that it decreased from $ 797 Mn at end of Dec. 2017 to $ 655 Mn at the end of 2018.
Similar to the above examples various industries have various raw materials used in the production of finished goods.
Finished products are made using raw materials, hence the Company at any time would like to have an inventory of such materials to be used in the manufacturing of goods. However, some raw materials may degrade during manufacturing or while inventory, they are charged to the cost of goods sold by the Company.
This has been a guide to what is Raw Material Inventory and its definition. Here we discuss the types of raw material inventory along with examples from companies in different industries. You may learn more about accounting from the following articles –