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written by | April 15, 2022

What are Raw Materials in the Manufacturing Industry?

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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 Corporations attempt to maintain only a small amount of raw materials on hand since they can be destroyed or outdated, and they demand working capital funds to store.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

Types of Raw Materials

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.

Also Read: Most Profitable Manufacturing Business to Start in India

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

hence, solving,

₹10,67,867+₹4,57,657- ₹9,15,315

  = ₹6,10,210

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.

Conclusion

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. 

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FAQs

Q: What are non-renewable raw materials?

Ans:

Raw materials which cannot be replaced after consumption are called renewable raw materials.

Q: What are renewable raw materials?

Ans:

Raw materials replaced after consumption are called renewable raw materials.

Q: What is the basic rule of accounting for raw materials?

Ans:

Unfinished products are classified as a current asset on the balance sheet by the inventories category. An entry is made on the debit side of the inventory account while recording the untreated material. The acquisition of primary products is recorded as a credit in the accounts receivable account.

Q: What are indirect raw materials?

Ans:

Indirect materials do not contribute significantly to the final product's creation but do help it.

Q: What are direct raw materials?

Ans:

Direct materials are chemicals that companies utilise directly to produce a final product.

Q: What are the raw materials?

Ans:

Unfinished materials or natural resources are utilised to generate or manufacture finished products for sale as raw materials. These materials can be utilised raw or treated, depending on their suitability.

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The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.