What are Raw Materials?

Case breakdown: Movie Action Replayy

The scene that you just saw, shows Kishen Chopra (played by Akshay Kumar) bargaining with a vegetable vendor. He tells the vegetable vendor that his wife is a spendthrift and therefore he has to travel long distance to buy cheap fruits and vegetables for his restaurant.

In this blog, Learning Perspectives, will explore what are raw materials.

Raw materials are substances that are used in the production or manufacture of goods. Similar to the scene that we saw, vegetables are raw materials for producing dishes that are to be served in a restaurant.

Raw materials are also considered as factors of production. For example: For a company that manufactures a car, steel is a raw material; a company that produces biscuits, flour and sugar are its raw materials and coconut or almonds are raw materials for an oil manufacturer.

Accounting:

Raw materials in accounting are a part of the inventory. In the balance sheet of the company, it is reported under the heading of current assets. Three parts of the inventory include:

Raw material
Work in Progress and
Finished Goods.

Value of raw material includes shipping cost, storage and preparation. When raw material is purchased, a company records it is through a journal entry. Journal entry recorded would debit inventory and credit cash. This is mainly done because cash is decreasing and current assets of the company are increasing. In the above scene, Value of raw material would include transport cost of traveling from Lokhanwala Complex and the cost of vegetables.

Raw materials can be divided into two types:

Direct Raw Materials
Indirect Raw materials

Direct materials are those materials that are direct in nature, these materials are directly involved in the process of making finished goods. For example: flour in a cake, wood in a chair or acrylic colors in a painting. These are recorded in the income statement under Cost of goods sold.

Indirect materials are those raw materials that are not directly traceable in the finished product. These can be oil, lubricants, tape etc. These can be shown as an expense in the income statement or can be categorized under manufacturing overheads.