Raw Materials Inventory Management
Defines: Total Cost of all components parts currently in stock that have not yet been used in
“Work-In-Progress” or Finished Goods Production. Separates in 2 Types of Raw Materials in
which it is observed to manage, Direct and Indirect Materials. Direct Materials, parts that make
the final product (EX: Silk, Wood, Wool) . Indirect Materials, not a part of the product but the
things that were consumed to make it or in the manufacturing process.(EX: glue, oil, cleaning
supplies, disposable tools, light bulbs, etc.)
Usage: To determine the cost of all components currently in stock that have not yet been used,
to manage it for when your business grows or vice versa.
Formula:
How to calculate raw materials inventory value:
Manufacturers, regardless of the size of their factory floor, will need to account for their raw
materials, business supplies, and finished products.
To do this, you’re going to have to determine the ending inventory value at the end of each
period.
To do this, you need to add the number of units you manufactured and the raw materials you
purchased during the period to the number of units at the beginning of a period.
For example, let’s say you’re a shoe manufacturer and want to account for the number of laces
you have:
50 laces + 100 laces = 150 laces
Now, subtract that number by the amount of inventory you have used during this period to find
out your ending inventory.
Let’s imagine you used 60 laces during production:
150 laces – 60 laces = 90 laces
Time to uncover the value of your remaining inventory, and this is simple, simple multiple your
remaining inventory by the cost for one unit of raw material:
90 laces x $1.50 = $135
And there you have it, the remaining raw material inventory level’s value comes in at $135. A
relatively easy formula to follow when calculating the value of your raw materials.
However, what about those of you who have different materials or even products at different
prices? It can be complicated to calculate the value for each different item.
How to calculate raw materials inventory turnover:
Raw materials inventory turnover = cost of goods sold/average raw materials inventory
The raw materials inventory turnover is the calculated rate that shows when companies use up
their raw materials in stock and need to replace them. This calculation can be helpful to
determine future inventory needs and help a company predict when it will need to order more
raw materials.
If a furniture manufacturing company wanted to calculate its raw materials turnover rate for the
past fiscal year, it would first calculate its average raw materials inventory.
It would do this by taking the value of its starting inventory from the beginning of the year,
adding it to its ending inventory, and dividing it by two.
($60,000 + $53,000)/2 = $56,500
Next the company would take its annual cost of goods sold, and divide that number by the
average raw materials inventory in which it equals the company's raw material inventory
turnover.
$229,000/$56,500 = 4.05 the company's raw material inventory turnover
If the company wanted to explore the inventory turnover further, it could divide the number of
days in a year, 365, by its turnover of 4.05. This could help generate the company's exact
inventory turnover rate, which can help determine how often it has to restock its inventory every
year. In this case, the equation 365/4.05 would equal 90.12. That means the company, on
average, replaces its current raw materials inventory with new inventory every 90 days, or three
months
Advantages:
A manufacturing company will often need a lot of data and information to effectively create
products while maintaining its financial budget. Using helpful calculations, such as determining
raw materials inventory, can help manufacturers understand their raw materials turnover rate,
generate helpful financial reports and determine when they'll need to restock their inventory
supply.
Disadvantages:
Different manufacturers need their software to perform different functions. For example, those
working in food and beverage need software that can perform food traceability. The use of
spreadsheets are fine for calculating turnover. But this doesn’t take into account every cost you
have. Dedicated software helps you calculate your actual profitability, as it is designed to cover
every aspect of your manufacturing business. it still depends on the management of software or
rather the management tools on hand overall.
Goal:
To manage the cost to manufacture the products by tracking the total cost and managing it to a
software.
