Types of raw materials

 

5 Inventory Types: From Raw   Materials

As products move down a manufacturing line, each added cost and inefficiency eats into profit margins. 

Fortunately, businesses can track each of these costs and inefficiencies through their manufacturing processes. Businesses can categorize materials as they move from process to process, from raw materials to work-in-progress, and finally as a finished product.

Without doing so accurately, it is likely that services will find their bottom line at the end of the year. If you want to keep your business costs to a minimum this year, read on to learn how you can use each of the 5 inventory types to your advantage.

1.Raw Materials Inventory

Raw material inventory includes items used to make the finished product. Raw materials can be items or components that businesses buy or own. In short, all those stocks that have not yet been used for manufacturing. For  purposes of accounting, raw materials are  to be considered inventory assets, debited on raw materials and credited to accounts payable. There are two  direct and indirect different categories of raw materials 

 

1.1 Direct Raw Materials

Direct raw materials are all the ingredients that make up the finished product. As an example, all parts used to make a bed will be considered raw materials, from wood directly to components such as metal frames and screws. Direct raw materials are considered a part  of goods produced of the cost, which is then divided into cost of goods sold and ending inventory.

1.2 Indirect Raw Materials

Indirect raw materials are materials that are manufactured during the manufacturing process, but are not part of the final product. Items such as cleaning supplies, disposable equipment, lubricants, and tape are examples of items that can be considered indirect raw materials.

Indirect raw materials are generally under overhead construction and add to the cost of goods sold. If only a small amount of an indirect raw material is used, they are sometimes reported as an expense.

2. MRO (Maintenance, Repair, and Operating)  Inventory

MRO inventory includes items used to run a construction company smoothly. MRO inventories may include such things as employee uniforms, industrial equipment, cleaning supplies, and safety equipment, as well as any materials you use to repair or maintain construction materials.

MRO items are critical to keeping operations running and making up a large percentage of total purchases for factories. But, as a category, it is often overlooked when it comes to inventory control. A factory line downtime every hour due to a faulty part costs them thousands of dollars. Many times that part is not in stock, so the cost to ship and install it is prohibitive, or it is not properly labeled or stored - and it takes hours to find this part.

When it comes to purchasing an MRO, it is not preferred with similar inventories like other inventories such as raw materials. Manufacturers often have multiple suppliers with no consistent purchasing strategy between their sites. With so many moving parts, costs go up, and MRO costs quickly make up a significant percentage of total manufacturing costs.

There are few best practices to consider:

• Create an efficient MRO procurement policy with purchase from.approved vendors to 

• Create a central location for the MRO inventory that is tracked with the same rigidity as all other inventories

• Renaissance terms and prices with suppliers annually in an effort to curb cost creep.

3. WIP (Work In Progress) Inventory

All materials used to make the finished product are considered WIP inventories. If you manufacture a bicycle, all the unfinished bikes in your shop can be considered WIP inventory.

You can also think of all materials used on the factory floor as WIP inventory. The WIP inventory does not include raw materials or finished goods sitting on the shelf that are ready for sale; They are nowhere in the middle, and thus receive the WIP designation.

When accounting for a WIP inventory, it typically receives its account entry on the general ledger and is an asset. Costs include raw material costs, labor costs, and factory overhead.

Calculating the WIP inventory formula can be time-consuming and difficult, so most businesses try to reduce it before a specific reporting period. Businesses that generally follow the Just Time (JIT) inventory philosophy typically have very few WIP inventories.

4.Packing Materials (PM) Inventory

The packing material list includes any items used in your business to pack the products you sell. If you make a toothpaste, the tube you put in the toothpaste can be classified as packing material. Any boxes or packaging you use to ship or store your products, as well as packing materials

5. Finished Goods (FG) 

Finished goods(FG) are items that are ready for showtime. They are manufactured from raw materials or purchased from a supplier, and are ready to be sold to customers. Finished goods that are completed for sale are considered merchantable by retailers.

For accounting purposes, finished goods are short-lived assets because they will be sold as quickly as expected. 

Calculate the value of your goods:

F G = (Cost of Goods Manufactured – Cost of Goods Sold) + Previous FG Value