What is the Raw Material Inventory?
Raw materials inventory is the cost of products in the company’s inventory that have not been used for finished products and work-in-progress inventory. Raw material inventory is part of inventory cost, reported under current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc. on the balance sheet.
Types of Raw Materials
There are two types of raw materials:
- Direct Raw Materials are the ones reused directly into the finished product like steel is used in making a table; plastic is used in the 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 sheetThe Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company., 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 is one of the biggest automobile companies. They purchase a variety of raw materials, including parts and 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.
The carmaker has not specifically mentioned the raw materials but combined the cost of such inventory at the end of the year in the annual report. The raw material at the end of 2017 and 2018 was nearly similar to $ 4,274 Mn in Dec. 2018 and $ 4,203 Mn in Dec. 2017.
Consider Boeing Inc., one of the largest aircraft manufacturers. The Company has not disclosed it specifically, but they have provided inventories per their various aircraft contracts. However, raw material includes used aircraft, stock materials, and spare parts.
We consider Microsoft Inc.’s producer of windows, laptops, software, and various other computer products.
The Company’s balance sheet shows that it decreased from $ 797 Mn at the end of Dec. 2017 to $ 655 Mn at the end of 2018.
Similar to the above examples, various industries have various raw materials used to produce finished goods.
Finished products are made using raw materials. However, some raw materials may degrade during manufacturing or inventory; they are charged to the cost of goods sold by the CompanyCost Of Goods Sold By The CompanyThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. . Hence, the company, at any time, would like an inventory of such materials used in the manufacturing of goods.
This article 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 –