Raw materials are the primary element in production costs.

Raw material cost

     One of the most important elements in calculating production costs for industrial activity, and sales costs for commercial activity, is accurately calculating the cost of raw materials for manufacturing or purchases for resale. This is done through two steps. 

First step : Pricing of incoming additives (local purchase, or imported)

Step two  : Calculate the cost of outgoing inventory (for production or sale). 

These steps are carried out through pricing models and an inventory control card ,  and we will show all of this in detail.

Raw materials item in cost accounting

Raw materials are one of the most important cost elements in any company, constituting the largest portion of production costs. Therefore, understanding how to manage the raw materials item in cost accounting is crucial to ensuring the efficiency and effectiveness of production processes.

First: Definition of the raw materials item

Raw materials are the materials that are transformed into finished products through the production process. Raw materials can include a variety of materials, such as:

• raw materials

Such as cotton, iron, and oil.

• semi-finished materials

Such as textiles, metal parts, and chemicals.

• Auxiliary materials

Such as packaging materials, oils, and fuels.

Second: Classification of raw materials

Raw materials can be classified according to several criteria:

• According to its nature
  • Natural raw materials: such as cotton, iron, and oil.
  • Manufactured raw materials: such as textiles, metal parts, and chemicals.
• According to its role in the production process
  • Basic raw materials: These are used in the formation of the final product.
  • Secondary raw materials: These do not directly contribute to the final product, but are essential to the production process.
• According to the duration of its consumption
  • Raw materials consumed: These are consumed during the production process.
  • Durable raw materials: They are not consumed during the production process and are used for more than one production cycle.

Third: Raw material evaluation

Raw materials are evaluated upon purchase or receipt from the warehouse. There are several methods for evaluating raw materials, such as:

• Actual cost

It is the cost of purchasing raw materials, including shipping and insurance costs.

• Standard cost

It is a predetermined cost for raw materials, based on market studies and historical data.

• The middle way

The average cost of raw materials in the warehouse is calculated over a specific period of time.

Fourth: Raw Materials Inventory Management

Raw material inventory management includes the following activities:

• Determining the target inventory level

It is the quantity of raw materials that must be kept in storage to meet production needs.

• Raw material request

Raw materials are ordered from suppliers based on target inventory levels and production needs.

• Receipt of raw materials

Raw materials are inspected upon receipt from suppliers to ensure their quality and conformity to the required specifications.

• Raw material storage

Raw materials are stored in a safe and suitable place to maintain their quality.

• Disbursement of raw materials

Raw materials are dispensed from the warehouse to the production departments based on disbursement requests.

Fifth: Raw material costs

The cost of raw materials consists of the following elements:

• Purchase cost: This is the cost of purchasing raw materials from suppliers.
• Shipping cost: This is the cost of transporting raw materials from suppliers to the company.
• Insurance cost: This is the cost of insuring raw materials against risks such as theft or damage.
• Storage cost: This is the cost of storing raw materials in the warehouse.
• Waste cost: This is the cost of raw materials that have been damaged or destroyed.

Sixth: The impact of raw materials on cost calculations

Raw materials play a crucial role in cost calculations , as they affect:

• Production cost: Raw materials make up the largest part of the production cost.
• Company profitability: The cost of raw materials affects the company's profitability.
• Pricing: The cost of raw materials affects the price of the final product.

Seventh: Improving raw material management

Raw material management can be improved through

• Using inventory management systems: Inventory management systems help monitor inventory levels and order raw materials in a timely manner.