Raw materials are the components that go into a manufacturing process to be turned into final commodities. Because most raw materials are largely standardised, we can use them in various products. Corporations attempt to maintain only a small amount of raw materials on hand since they can be destroyed or outdated, and they demand working capital funds to store. Raw materials are utilised in a wide range of goods and come in various shapes and sizes. The input commodities or inventories that a company needs to make its products are known as raw materials. For example, integrated chips used in computer manufacturing are raw materials for a computer manufacturer.
Did you know?
Only 15% of the world's energy comes from renewable sources.
A Detailed Article About Raw Materials, Type of Raw Materials and Importance
Even though all raw materials are obtained organically, they can be classified into three groups based on their origin.
1. Mining-based materials like minerals, sand, clay, gasoline are obtained by mining the earth.
2. Animal-based materials include flesh, blood, milk, egg, fat, all of which are derived from animals.
3. Plant/tree-based — Plants and trees provide resources such as palm, soybean, rice bran, coconut oil, etc.
On the other hand, a production unit splits raw materials into two main kinds.
Direct Raw Materials
Direct raw materials are the primary components used to create a final product. Wood, for example, is a direct raw material used to make furniture such as chairs, tables, and beds. Another example is leather, which makes purses, shoes and bags.
Indirect Raw Materials
Indirect raw materials, on the other hand, are resources that are used to complement direct raw materials in the production of a finished product. For example, glue, nails, varnish, and other materials required to construct wooden furniture such as chairs, tables, and beds are indirect raw materials. Likewise, buckles, metal hoops, zips, adhesive, lining fabric, colours and other components used in manufacturing leather purses, shoes and bags are indirect raw materials.
Importance of Raw Materials
It is evident from the preceding description and meaning that making any finished product necessitates the use of raw materials, which are subsequently processed and transformed into finished items.
Inventory management enters the scene at this point. Because the finished items we sell are manufactured from these components, it is critical to keep raw materials inventory in the correct number and location to avoid catastrophes.
Examples of Raw Materials
Examples of direct and indirect raw materials are shown below.
Sports Equipment Manufacturer
A company manufactures cricket bats and footballs, and below are the materials used in production.
Direct Raw Materials
- Wood for bat
- Synthetic covering for football
- Rubber for bat handle
Indirect Raw Materials
- Gloves for workers
- Wood glue
- Types of machinery
Wood, synthetic coverings and rubber are considered direct raw materials because they are directly linked to creating tables and chairs. Therefore, the direct raw materials may be linked to each unit when determining the cost per unit.
Gloves for workers, wood glue and machinery are likely to be regarded as indirect materials because the amounts used aren't considered, and they aren't directly linked to each item manufactured.
Direct Raw Materials Budget
To avoid shortages, a firm calculates the amount of direct raw materials required for particular periods. As a result, an entity can eliminate needless inventory stock, potentially lower ordering costs and lessen the danger of material deterioration by closely controlling the amount of direct raw materials acquired and consumed.
For various causes, raw materials might decay in storage or become worthless in a product. The corporation labels them outdated in this situation. If this happens, the inventory is deducted from write-offs, and the outmoded stock is credited to decreasing assets.
Also Read: Materials Consumption Summary in Tally
Indirect Raw Materials Budget
Indirect raw materials are not included in the final product but are used extensively throughout the manufacturing process. Therefore, long-term assets will be recorded for indirect raw materials. In addition, long-term assets are frequently subject to a depreciation schedule that allows them to be expensed over time and matched to the earnings they contribute to. Therefore, degradation for indirect raw materials will typically be lower than for other long-term assets such as a building expensed over several years.
Sourcing and Processing of Raw Materials
Following the selection of raw materials, choosing the appropriate processing technology is necessary. Furthermore, deciding on the source of raw materials is critical. These needs are met either via internal sources or through imports under government regulations.
Furthermore, before beginning with the process of placing orders, it is critical to conduct a thorough cost estimation to reduce production costs and increase profit margins.
Nevertheless, there are a few things to keep in mind while deciding on a processing method. These are some of them:
- The amount of electricity or water that is required.
- Check to see if any unique environmental or pollution regulations must be adhered to.
- The complexity of the machines or the number of skilled employees required during the procedure.
- Check if a process or product patent is required to use the processing technique you've chosen.
- The technology's suitability for the current environment and conditions.
- In addition to these issues, adequate planning is essential because the lack of required raw materials may cause production to be halted, resulting in idle machinery and people. Furthermore, ordering too much in advance can result in the working capital being locked up.
The Calculation Formula for Raw Materials
Now we'll look at some basic formulas for estimating raw materials.
We may use the formula below to figure out how much raw material is needed in the manufacturing process:
Entering RM+RM bought – Exiting RM = Raw material used.
Entering RM – ₹10,67,867
RM bought – ₹4,57,657
Exiting RM – ₹6,10,210
So let us solve as per the above formula,
₹10,67,867+₹4,57,657 – ₹6,10,210 = ₹10,67,867
Consequently, the raw material costing ₹10,67,867 was used in the procedure when we used the calculation.
The balance sheet calculates the closing stock value, opening stock value, and materials acquisition value.
The formula for calculating raw material closing stock is as follows.
Opening raw materials + RM bought – RM utilised = Exiting RM.
Let's look at an example to assist us in comprehending this.
Let's pretend Moon Manufacturing Company has:
Entering RM – ₹10,67,867
RM bought – ₹4,57,657
RM utilised – ₹9,15,315
Therefore, Exiting RM is worth ₹6,10,210 with Moon Manufacturing company.
Renewable Raw Materials
Renewable raw materials may have unique qualities and functionalities that are impractically difficult to achieve with fossil fuels. Manufacturing based on renewable raw materials can help save money while also allowing for development. Using renewable raw materials also helps conserve fossil resources and may help to reduce greenhouse gas emissions. Using life cycle analysis tools, we assess the impact on the environment throughout the manufacture and usage of products made from renewable raw resources. The evaluation of life cycle analyses of rival items reveals which option is more environmentally friendly. Customers are also becoming more interested in products made from renewable raw resources, which are thought to be healthier, more natural and have favourable ecological consequences. Last but not least, using renewable raw materials expands our raw material base, reducing our reliance on fossil fuels.
Non-Renewable Raw Materials
Oil is a non-renewable resource used to produce a wide range of energy products, including gasoline and diesel fuel. Natural gas is produced by oil wells and consists of various gases such as methane, propane and butane. In addition, liquid gasoline, oil shale and tar sands are non-renewable energy materials. Although renewable energy sources account for only 15% of global energy, growing concerns about energy scarcity drives the development of geothermal, solar, wind and other environmentally friendly energy-producing methods.
The supply of raw materials is critical to an economy's growth. The input commodities or inventories that a company needs to make its products are known as raw materials. Direct raw materials are used directly in the manufacturing process, such as wood for a cricket bat. The value of direct raw materials inventory is shown as a current asset on the balance sheet. A country may rely on another country for a specific raw material, or it may be self-sufficient. As a result, the amount of raw fundamental construction or manufacturing impacts the entire supply chain.
Follow Khatabook for the latest updates, articles and news blogs related to medium, small and micro-businesses (MSMEs), business tips, income tax, GST, salary, and accounting.