definition of raw material
Answers
Answer:
The basic material from which a product is made.
Answer:
the basic material from which a product is made
Explanation:
Raw materials are materials or substances used in the primary production or manufacturing of goods. Raw materials are commodities that are bought and sold on commodities exchanges worldwide. Traders buy and sell raw materials in what is called the factor market because raw materials are factors of production as are labor and capital.
Raw Materials
Raw Materials Explained
Raw materials are used in a multitude of products. They can take many different forms. The kind of raw materials inventory a company needs will depend on the type of manufacturing they do. For manufacturing companies, raw materials inventory requires detailed budgeting and a special framework for accounting on the balance sheet and income statement.
Examples of raw materials include: steel, oil, corn, grain, gasoline, lumber, forest resources, plastic, natural gas, coal, and minerals.
Accounting Basics
Manufacturing companies take special steps to account for raw materials inventory. This includes three distinct inventory classifications on their balance sheet compared to just one for non-manufacturers. The current assets portion of the balance sheet for manufacturing companies will include:
Raw materials inventory
Work-in-process
Finished goods
All inventory, including raw materials inventory, should be valued at its comprehensive cost. This means its value includes shipping, storage, and preparation. The typical journal entries in an accrual accounting system for the initial purchases of raw materials inventory include a credit to cash and a debit to inventory. Debiting inventory increases current assets and crediting cash will reduce cash assets by the inventory amount.
When a company uses raw materials inventory in production, it transfers them from the raw materials inventory to the work-in-process inventory. When a company completes its work-in-process items, it adds the finished items to the finished goods inventory, making them ready for sale.
Direct and Indirect Raw Materials
In some cases, raw materials may be divided into two categories: direct and indirect. Whether a raw material is direct or indirect will influence where it is reported on the balance sheet and how it is expensed on the income statement.
Direct raw materials are materials that companies directly use in the manufacturing of a finished product, such as wood for a chair. Indirect raw materials are not part of the final product but are instead used comprehensively in the production process.
Indirect raw materials will be recorded as long-term assets. Within long-term assets, they can fall under several different categories including selling, general, and administrative or property, plant, and equipment. Long-term assets usually follow some depreciation schedule which allows the assets to be expensed over time and matched with revenue they help to produce. For indirect raw materials, depreciation timing will usually be shorter than other long-term assets like a building expensed over several years.
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