CHAPTER III

ACCOUNTING FOR RAW MATERIALS

INTRODUCTION

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 the factor market because raw
materials are factors of production, as are labor and capital.

It's inventory is the total cost of all component parts currently in stock that have not yet been
used in work-in-process or finished goods production. In other words, this is the unprocessed
material like metal stock, rubber blanks, or unrefined natural resources that companies use
in there manufacturing processes to produce finished goods to sell to consumers.

According to L.J De Rose"“Material management is the planning, directing, controlling and

co-ordination of all those activities concerned with material and inventory requirements,
from the point of their inception to their introduction into manufacturing process.”(2010)

Raw materials are the constituent parts input into a production process, where they are
transformed into finished goods. Most raw materials are highly standardized, and so can
serve as inputs into multiple products. Raw materials are tracked in a separate inventory
account at their historical cost.
There are two subcategories of raw materials, which are:
 Direct materials. These are materials incorporated into the final product. For
example, this is the wood used to manufacture a cabinet.

 Indirect materials. These are materials not incorporated into the final product, but
which are consumed during the production process. For example, this is the
lubricant, oils, rags, light bulbs, and so forth consumed in a typical manufacturing
facility.

Raw materials of all types are initially recorded into an inventory asset account with a debit
to the raw materials inventory account and a credit to the accounts payable account. When
raw materials are consumed, the accounting treatment varies, depending on their status as
direct or indirect materials.
BODY

A good example of raw material is lumber for a guitar manufacturer like Fender Guitars.
When Fender gets a shipment of lumber, it records the lumber as raw material inventory
because the wood will eventually be finished goods inventory or guitars.

There are many different types of inventory across the business spectrum. Manufacturers
have different types of inventory than retailers and retailers have different types of inventory
than restaurants. These materials are most often associated with manufacturers.

According to World Bank data, the Congo Republic, South Sudan, Libya, and Iraq round out
the world’s top natural resource producers by a percentage of gross domestic product (GDP).

Direct materials are unprocessed resources that can be specifically traced to an end product.
Lumber is a good example of a direct raw material. When Fender receives a batch of lumber,
it sorts the woods and stamps it for specific guitars. These direct materials are designated to
specific finished goods.

Indirect materials are unprocessed materials that can’t really be designated for specific
finished goods. Most of the time indirect materials are called factory supplies on the balance
sheet. Fender Guitars would probably consider guitar finish an indirect raw material. Guitar
finish is delivered in 55-gallon barrel drums. You can’t really designate finish for each guitar,
so the drums of guitar finish and lacquer are usually called factory supplies.

Smaller amounts of direct materials are sometimes labeled indirect unrefined materials too.
The screws that bolt pick guards onto Fender’s guitars might be considered a factory supply
as well. The decision to classify a direct raw material as a factory supply depends on the
materiality principle. Smaller costing items usually fall into this category.
CONCLUSION

This chapter describes and illustrates the raw materials with it's kind of categorizations;
direct and indirect materials.We had discussed about the accounting of raw material,
specifically on recognition, recording, as we as on how it is present in the entity’s financial
statements.

Raw materials play an important role in the production process to a great extent as the
success of the economy of a country is determined by the amount of natural resources held
by a country within its borders. A country holding ample amount of natural resources does
not require importing of as many raw materials.
On the other hand, it can be seen that indirect materials are mainly utilized across the
production process, but they are not directly involved with the production process. In other
words, they do not constitute a major ingredient of the final product.

Subsequently, to record the purchase of this inventory, a credit is made to the accounts
payable account, to account for increasing credit balances that the company has to be made
over the course of time.
When raw materials are used within the production process, the accounting treatment varies
according to the nature of the raw materials that are utilized. In the case of direct materials,
the work in process inventory account is debited to record that the inventory is currently
being utilized for production processes.

To conclude, it can be seen that raw materials are mainly inputs and materials that are
required for the production process. As a matter of fact, it can be seen that these inputs are
required for the core activity of the business, where goods and services are mainly produced
for the purpose of resale.

Depending on their classification as direct or indirect raw materials, they are subsequently
treated to reflect their utilization in the books.

However, the purchase of raw materials is different from the purchase of other goods and
services, predominantly because of the reason that they are purchased with the objective of
being processed and manufactured for resale (in case of direct raw materials).
Accounting to me is challenge as a whole; it is a good subject to learn because accounting
knowledge
is always in demand. So far, I am on a good path learning the basics of accounting. I’ve
learned how
accounting affects business and how it allows organizations to identify cash inflows and
outflows. This
accounting course provided me a great opportunity to understand the various important
aspects of
accounting that I believe will be helpful in my future practical life. I need to begin my own
particular
business in future for that it's important to have great knowledge of Financial and
Managerial
Accounting. This course has helped me to comprehend numerous essential ideas of
accounting. This
knowledge is going to help me to comprehend and investigate financial statements and will
empower
me to take great business choices in view of accounting data.

Raw materials in accounting is another topic for me that is enteresting to learn because it
always businesses. We can manage to learn more by reading and growing our skills in order
to be successfully because in this article, it made us thankful and grateful for another
wisdom to be created in our minds.
Tho, this is a hard one but if you open your mind and heart to it, you will learning and
practicing the benefits of it. Because in my idea, learning about these topics
Also the availability of raw materials, of suitable quality and quantity, is a basic factor in
making decisions on the establishment of building-material production plants, regardless of
the scale of production. The size of raw-material deposits is an important consideration in
the choice of the scale of production

And materials are very important because It is as important as manufacturing, engineering

and finance. The supply of proper quality of materials is essential for manufacturing standard
products. The avoidance of material wastage helps in controlling cost of production. Material
management is essential for every type of concern in our daily lives.

Furthermore,according to N.K. Nair “Material management is the integrated functioning of

the various sections of an organization dealing with the supply of materials and allied
activities in order to achieve maximum co-ordination.”(2009)
Yes, I strongly agree that N.K. Nair has emphasized the co-ordination of all those activities
which are related to the efficient use of materials.

The supply of proper quality of materials is essential for manufacturing standard products.
The avoidance of material wastage helps in controlling cost of production. Material
management is essential for every type of concern in our daily living. The material cost
content of total cost is kept at a reasonable level. Scientific purchasing helps in acquiring
materials at reasonable prices. Proper storing of materials also helps in reducing their
wastages. These factors help in controlling cost content of products.

We, people must appreciate our surrounding because we are the ones that also benefitted.
By the natural resources we have and everything, so we should properly take care of it and
when time comes, we will not be into hunger and etc;
REFERENCE

 Raw Materials Bibliography, General References to Selected Raw Materials and Basic
Economic Resources, United States Tariff Commission (1939)
 Anderson, H. C. 1945. Accounting procedure for control of incoming material.
N.A.C.A. Bulletin (September 1): 22-35.
 Berglund, W. J. 1965. Ordering and controlling of supplies - The "pattern accounting"
procedure. Management Accounting (December): 35-40.
 Block, W. A. 1933. Accounting for material use and control. N.A.C.A. Bulletin
(October 15): 201-208.
 Bowers, B. B. 1982. Product costing in the MRP environment. Management
Accounting (December): 24-27.