Definition: Raw materials are the inputs or resources that a company uses to manufacture its finished products. 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.
What Does Raw Materials Mean?
What is the definition of raw materials? 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.
Let’s take a look at an example
Example
There are two main types of raw materials: direct and indirect. 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.
Summary Definition
Define Raw Materials: Raw material means the inputs to producing a finished product.
