Movie Case Study
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 distances to buy cheap fruits and vegetables for his restaurant.
In this blog, Learning Perspectives will explore what are raw materials.
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 factors of production. For example: For a company that manufactures a car, steel is a raw material; for 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. Under 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.
The value of raw materials includes shipping costs, storage, and preparation. When raw material is purchased, a company records it through a journal entry. Journal entries recorded would debit inventory and credit cash. This is mainly done because cash is decreasing and the current assets of the company are increasing. In the above scene, the Value of raw materials would include the transport cost of traveling from Lokhandwala 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 the 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.
