“Inventory” usually refers to finished goods that are sold to consumers. There are, however, many different types of inventory. For example, those who produce or manufacture their own products will have something called “raw materials inventory” in their supply chain.
This type of inventory is first in line in procurement, receiving, and storage before any of the other products in the supply chain. Raw materials are incredibly critical in the high-quality production of finished products, as without them, the production process is literally at a standstill.
What is raw materials inventory?
Briefly put, raw materials inventory refers to materials used to create finished goods. They differ from what businesses would sell to customers directly or as-is but are essential to completing your finished goods inventory.
After raw material procurement from a manufacturer or supplier, a business keeps them in storage until required for the manufacturing process. As the raw materials move through the manufacturing process, they become work-in-progress inventory during the process of becoming new products.
After its completion, the final product is considered finished goods inventory and is now ready for selling to the end consumer or supplied to a retailer. Raw materials are incredibly important in the overall supply chain, so businesses need to plan their procurement logistics meticulously to ensure there is enough raw materials inventory on hand to create finished goods.
Effective raw materials inventory management using inventory management software for manufacturing also aids in creating a lean supply chain, helping organizations to reduce costs further while increasing overall efficiency.
How to calculate raw materials inventory
Here’s how you can calculate your raw materials inventory:
Determine the time period
First, determine the period you will use to find the values you need for your calculations. This will allow you to create accurate values for your formulas. For instance, if you calculate your raw materials inventory for a reporting period of every two months, then that’s where your formula values will be coming from.
Find the value of your starting inventory
Finding the value of your organization’s starting raw materials inventory means taking all your direct and indirect materials from the beginning of a specified period and adding up the cost to get the total value.
Get the sum of raw materials purchased
Keeping track of the raw materials you purchased over the predetermined period and finding the sum of such allows you to get the value of the raw materials gained. You can then add this value to that of your starting raw materials inventory.
Subtract your cost of goods sold
Take the cost of all your finished goods and products sold over your specified period and total it. Then, subtract that number from the sum of two values: Your starting raw materials and raw materials purchased. The resulting value will be your raw materials inventory.
In summary, your raw materials inventory can easily be calculated using the formula below:
Beginning inventory + raw materials purchased – cost of goods sold = raw materials inventory