A raw material, also known as a feedstock, unprocessed material, or main commodity, is a basic substance used to manufacture goods, completed products, energy, or intermediate components that are utilized as feedstock for future finished products. The term “feedstock” implies that these commodities are bottleneck assets that must be used to make other products.
Raw materials are also factors of production that are traded on commodity exchanges. They also play an important part in a country’s economic development.
Understanding Raw Materials
For manufacturing companies, raw materials are an important part of inventory management. As a result, maintaining track of these supplies is crucial in order to avoid any manufacturing problems. Almost everything that is made and sold is made from unfinished materials pulled up from the ground. Steel, for example, is a basic material used in the vehicle industry.
These resources, which are naturally available in a variety of forms, serve as main inputs in the mass manufacturing of a variety of products. Recyclable waste, on the other hand, becomes a secondary commodity in the production of completed goods.
Many countries rely on their mineral riches, which are used by others as raw materials. A country with enormous natural resources also has the potential to become economically self-sufficient.
Export is the most effective strategy for countries to produce income in order to increase domestic production and create new jobs. Exporting raw or unfinished resources, on the other hand, maybe harmful to a country’s economy. Importers, for example, may opt-out of such an arrangement due to the exporter’s export taxes and restrictions, which impair the latter’s revenue collection.
Sources of Raw Materials
Depending on how they’re made, these materials fall into one of three categories:
· Animal-based: The most prevalent customers of these commodities are agro-industries.Textile, leather, dairy, and other industries process materials such as leather, wool, silk, and other natural fibers to create finished goods.
· Plant-Based: These are materials obtained from forestry and agriculture. Sugar, cellulose, cooking oil, corn, lumber, cork, cotton, and other unprocessed commodities fall into this category, which is also known as vegetable-based unrefined resources.
· Mineral-Based: Clay, sand, marble, iron ore, gasoline, natural gas, coal, precious metals, and other mineral-based commodities can all be acquired by extraction. This type of material is used in industrial settings or to carve stunning jewelry.
An In-Depth Understanding of Sources of Raw Materials
Example 1: The Organization for Economic Co-operation and Development (OECD) undertook research to see how mineral commodity exports can help boost overall economic growth. It looked at four African countries’ export limitations on metals and minerals.
To support indigenous downstream industries, Gabon, South Africa, Zambia, and Zimbabwe restricted the export of copper, manganese, lead, and chromite, respectively. Export tariffs, outright export bans, and non-automatic export licensing requirements were all investigated by the OECD.
According to the study, these restrictions had no positive impact on downstream mineral processing sectors. The outcomes, on the other hand, were detrimental to the mining industry. It also stated that the economic impact of export limits is dependent on the type of resource exported by a country.
The issue is known as “Dutch disease” or “resource curse” occurs when a country has an abundance of natural resources to profit from yet lacks economic growth and development. The OECD found that removing barriers to mineral export can benefit global economic prosperity.
Example 2: Following the harmful impact of COVID-19 on numerous businesses, the European Union and Ukraine recently signed a Memorandum of Understanding (MoU) to enhance raw material supplies. Green and digital projects in defense, aerospace, automotive, renewable energy, healthcare, electronics, and other industries will benefit from these resources.
It happened after the European Commission announced the Action Plan on Critical Raw Materials in September 2020. The EU declared in 2020 that it will enhance bauxite, strontium, titanium, and lithium supplies to strengthen mineral supply lines following the pandemic’s economic recovery.
Accounting for Raw Materials
Manufacturing units must budget for raw materials inventory and account for it on their balance sheets. The inventory label on the balance sheet identifies unprocessed commodities as current assets. When documenting an unpolished resource, an entry is made in the debit side of the inventory account. The acquisition of these supplies, on the other hand, is recorded as a credit in the accounts payable account.
The finished items inventory is debited after the manufacturing is completed, while the work in progress account is credited. The work in the process section is also omitted if the production process is short.
The accounting process will be simplified by categorizing raw or unfinished items into direct and indirect categories:
· Direct Materials- These are fundamental input items or unprocessed resources utilized directly by enterprises to make a finished product, such as wood, cotton, and so on. The work in process account is debited with unrefined materials utilized in the manufacturing process for direct materials. When there is no inventory, however, the same account is credited.
· Indirect Materials- Unprocessed materials that do not immediately constitute a part of the ultimate product are referred to as indirect materials. Instead, they merely contribute to its creation. Glue, tape, oil, and other long-term factory supplies are examples. In addition, the nature and type of indirect materials utilized in the production process are taken into account when accounting for them.
The historical cost of direct materials is tracked in a separate inventory account. Raw material prices are reflected in the Cost of Goods Sold (COGS) account when goods are sold. For indirect materials, the overhead account is debited, and the raw materials inventory asset is credited. After the accounting period, the remainder is split between the cost of goods sold and closing stocks.