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Raw Materials

Definition

A raw material, also known as a feedstock or most correctly unprocessed material, is a basic material that is used to produce goods, finished products, energy, or intermediate materials which are feedstock for future finished products. As feedstock, the term connotes these materials are bottleneck assets and are highly important with regard to producing other products. An example of this is crude oil, which is a raw material and a feedstock used in the production of industrial chemicals, fuels, plastics, and pharmaceutical goods; lumber is a raw material used to produce a variety of products including all types of furniture. Metallic raw material production follows the processes such as crushing, roasting, magnetic separation, flotation, and leaching, smelting and alloying.

What are 'Raw Materials'

Raw materials are materials or substances used in the primary production or manufacturing of goods. Raw materials are often referred to as commodities, which are bought and sold on commodities exchanges around the world. Raw materials are sold in what is called the factor market, because raw materials are factors of production along with labor and capital.

Explaining 'Raw Materials'

Raw materials are accounted for in an intermediate inventory account used by manufacturing companies. As raw materials are used, raw materials inventory is decreased, while work-in-progress accounts are increased. When the work-in-process items are completed, they are transferred to finished goods, and are accounted for as cost of goods sold upon sale.

Direct vs. Indirect Raw Materials

Raw materials may be divided into two major classifications: direct and indirect. Direct raw materials are materials that can be directly traced to the finished product. For example, lumber may be directly traced to a completed chair, so in this situation, lumber is a direct expense.

Fixed vs. Variable Costs

Another major classification that can be used to describe raw materials is "fixed or variable costs." Fixed costs relate to charges that do not vary based on inputs or production levels. Variable costs relate to charges that fluctuate based on the quantity being produced. For this reason, raw materials are typically variable manufacturing costs because they are only purchased during the production of a good. If no good is being produced, the cost is not incurred, and because it can be avoided by reducing production, raw materials are a variable cost.

Direct Raw Materials Budget

A manufacturing entity calculates the amount of direct raw materials needed for specific periods, to ensure shortages do not occur. Also, with the specific amount of direct raw materials, an entity has the ability to reduce inventory stock and security, lower ordering costs, and reduce the risk of material obsolescence. The direct raw materials budget is calculated by adding the raw materials required for production to the anticipated or desired ending balance of direct raw materials. This summation is reduced by the amount of direct raw materials on hand at the beginning of the period. The final figure is the total direct raw materials that need to be purchased.

Further Reading

Financial investors in international raw materials and food markets and price movements of those commodities
search.proquest.com [PDF]
In the paper an attempt is made to analyse the impact of the involvement of financial investors on primary commodity prices in the international market. This phenomenon has been identified as a relatively new yet important attribute of the contemporary world …

Impact of small and medium enterprises on economic growth and developmentImpact of small and medium enterprises on economic growth and development
worldscholars.org [PDF]
In the paper an attempt is made to analyse the impact of the involvement of financial investors on primary commodity prices in the international market. This phenomenon has been identified as a relatively new yet important attribute of the contemporary world …

Raw-material-intensive Economy and Development of Small and Medium-sized Enterprises in KazakhstanRaw-material-intensive Economy and Development of Small and Medium-sized Enterprises in Kazakhstan
search.proquest.com [PDF]
In the paper an attempt is made to analyse the impact of the involvement of financial investors on primary commodity prices in the international market. This phenomenon has been identified as a relatively new yet important attribute of the contemporary world …

Hierarchical structure in financial marketsHierarchical structure in financial markets
link.springer.com [PDF]
In the paper an attempt is made to analyse the impact of the involvement of financial investors on primary commodity prices in the international market. This phenomenon has been identified as a relatively new yet important attribute of the contemporary world …

The problem of financing of economic developmentThe problem of financing of economic development
www.jstor.org [PDF]
In the paper an attempt is made to analyse the impact of the involvement of financial investors on primary commodity prices in the international market. This phenomenon has been identified as a relatively new yet important attribute of the contemporary world …

Critical raw materials: A perspective from the materials science communityCritical raw materials: A perspective from the materials science community
www.sciencedirect.com [PDF]
In the paper an attempt is made to analyse the impact of the involvement of financial investors on primary commodity prices in the international market. This phenomenon has been identified as a relatively new yet important attribute of the contemporary world …

An economic analysis of the financial viability of switchgrass as a raw material for pulp production in eastern OntarioAn economic analysis of the financial viability of switchgrass as a raw material for pulp production in eastern Ontario
www.sciencedirect.com [PDF]
In the paper an attempt is made to analyse the impact of the involvement of financial investors on primary commodity prices in the international market. This phenomenon has been identified as a relatively new yet important attribute of the contemporary world …

Solubility and dissolution properties of generic rifampicin raw materialsSolubility and dissolution properties of generic rifampicin raw materials
www.tandfonline.com [PDF]
In the paper an attempt is made to analyse the impact of the involvement of financial investors on primary commodity prices in the international market. This phenomenon has been identified as a relatively new yet important attribute of the contemporary world …

Limits to the critical raw materials approachLimits to the critical raw materials approach
www.icevirtuallibrary.com [PDF]
In the paper an attempt is made to analyse the impact of the involvement of financial investors on primary commodity prices in the international market. This phenomenon has been identified as a relatively new yet important attribute of the contemporary world …

Q&A About Raw Materials

Why should you calculate your direct raw material budget ?

To ensure shortages do not occur , an entity has ability reduce inventory stock , lower ordering costs , reduce risk of obsolescence , and avoid unnecessary purchases .

What two classifications can be used to describe raw materials?

Direct and indirect.

What is the definition of raw materials?

Raw materials are materials or substances used in the primary production or manufacturing of goods. Raw materials are often referred to as commodities, which are bought and sold on commodities exchanges around the world.

Why would you want your ending balance to be positive ?

To ensure shortages do not occur , an entity has ability reduce inventory stock , lower ordering costs , reduce risk of obsolescence , and avoid unnecessary purchases .

What do direct raw materials represent?

Direct raw material represent expenses that can directly trace to a finished product. For example, lumber may be directly traced to a completed chair, so in this situation lumber is a direct expense.

How does one classify fixed costs?

Fixed costs relate to charges that do not vary based on inputs or production levels. Variable costs relate to charges that fluctuate based on quantity being produced. For this reason, raw materials are typically variable manufacturing costs because they are only purchased during the production of a good. If no good is being produced, the cost is not incurred and because it can be avoided by reducing production, raw material are a variable cost .

How does one calculate direct raw material budget?

The direct raw material budget is calculated by adding the amount of required for production plus an anticipated ending balance of direct raw material . This sum is reduced by any amount already held at beginning inventory . This summation will equal total planned usage for all periods .