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What is Raw Material? Formula, Types, & Importance

What are raw materials? Types and their importance,
direct vs indirect raw materials & Calculation examples

Every other product we use has been produced by using some or the other raw materials. It is the most crucial component of inventory for any manufacturing unit and therefore,  managing inventory of  raw materials becomes crucial too. For example, natural latex obtained from trees is used to make several finished products such as mattresses, gloves, balloons, rubber bands, tennis shoes, etc.

What is raw materials?

Raw materials are unprocessed or minimally processed material that serve as the fundamental substances or components essential for the production of goods or the provision of services.

Types of raw materials

Though all the raw materials are obtained naturally, they can be divided into 3 types based according to where it is derived from.

Plant/tree-based – materials like vegetables, fruits, flowers, wood, resin, latex are obtained from plants and trees.

Apart from this, a manufacturing unit divides the raw materials into 2 main categories.

Direct vs indirect raw materials

Direct raw materials are primary components. Wood for furniture; leather for purses. Indirect raw materials supplement. Glue, nails for furniture; buckles, zips for bags.

Importance of raw materials

From the above-discussed definition and meaning, it is clear that producing any finished product requires raw materials, which are then processed and made into finished goods.

This is where inventory management comes into the picture. It is important to maintain raw materials inventory in the proper quantity and at the right place to avoid any mishaps since the finished products that we sell are made from these materials.

Raw Material Calculation

Essential formulas for calculating raw materials.


Raw Material Used Formula:

Opening + Purchases - Closing

Equals:

Opening materials - $ 12000

Purchased materials - $ 5000

Closing materials - $ 9000

Calculate Using Formula:

12000 + 5000 – 9000 = 8000

Material worth $ 8000 used.

Worth values from balance sheet.

Closing Stock Formula:

Opening + Purchases - Used = Closing

Essential Resources:

Let’s understand this with the help of an example,

Articles:

https://www.readyratios.com/reference/accounting/raw_materials.html

Videos:

What is Raw Materials: https://www.youtube.com/watch?v=uRh96rvK_h0

Suppose Star Manufacturing Company has

Opening raw materials worth – $ 12000

Raw materials purchased worth – $ 5000

Raw material used worth – $ 8000

Therefore, as per the formula,

12000 + 5000 – 8000 = 9000

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