Raw materials inventory is the stock of raw materials and purchased components that a manufacturer holds but has not yet put into production. The main entry describes raw materials as an economic category, from crude oil and metal ores to cotton and timber, and how their prices behave. This entry covers the accounting balance.
Its place in manufacturing accounts
Manufacturers usually keep three inventory accounts. Materials are recorded in raw materials inventory when they are bought. When they are issued to the factory floor, their cost moves into work-in-process inventory, where direct labour and overhead are added. When products are completed, the total cost moves to finished goods inventory, and then to cost of goods sold when they are sold.
In accounting, "raw materials" is used broadly. For a furniture maker it includes timber, fabric, screws and glue; for a car maker it can include steel and parts bought from suppliers that are themselves finished products. Materials that become part of the product and can be traced to it are direct materials; small items such as glue are often treated as indirect materials within overhead.
Raw materials inventory is reported within total inventory as a current asset, and companies often disclose the split between raw materials, work in process and finished goods in the notes. It is valued at cost, using a method such as FIFO or weighted average, and written down if its value falls below cost.